Over at Worthwhile Canadian Initiative, Stephen Gordon argues that capitalists are not rich. Of course, wealth is more or less synonymous with owning things that can be broadly defined as capital.
Stephen’s argument is focused on income: “If capital income is concentrated among high earners, then it could still be argued that increasing labour’s share of income will reduce inequality.” Canadians with annual incomes over $250,000 undeniably do collect a larger share of the country’s capital/investment income than of its employment income.
But Stephen presents graphs purporting to show that Canadians earning between $15,000 and $80,000 also receive a larger share of investment income than of employment income. These graphs supposedly confound the idea that increasing labour’s income share reduces inequality.
There are a couple of problems with this presentation. First, Stephen counts all pension income – from the Canada Pension Plan, workplace pensions and RRSPs – as “investment income.” Of course, most pension income goes to retirees with incomes under $80,000. At the end of his post, Stephen acknowledges that pensions drove his results.
So, is it reasonable to classify all pension benefits as “investment income”? Pension plans and RRSPs obviously do make investments and attempt to collect investment income.
But only something like half of the income received from pension plans and RRSPs represents investment returns. The other half represents a return of the principal invested (i.e. deferred wages).
In commenting on Stephen’s post, Nick Rowe offered this point as a “minor quibble.” But my guess is that, if pension benefits were evenly split between “investment income” and “employment income,” the conclusion would change.
The second problem is that Stephen substantially understates capital gains, which are heavily concentrated among the rich. (About half of capital gains accrue to the fewer than 1% of taxfilers making more than $250,000.)
Stephen’s calculation of total “investment income” included $14 billion of “Taxable Capital Gains” from 2008. Of course, since only 50% of a realized capital gain is taxable, actual income from capital gains was double that amount.
Furthermore, 2008 was hardly a normal or representative year for capital gains. The worst stock-market crash since 1929 obviously put a dent in them. By comparison, “Taxable Capital Gains” were $20 billion in 2006 and $23 billion in 2007. So, income from capital gains was $40 billion or $46 billion, about triple the amount that Stephen originally included.
Therefore, I do not buy the claim that Canadians earning between $15,000 and $80,000 receive a larger share of investment income than of employment income.