Poor Capitalists?

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.


  • I believe Stephen’s CRA data also counts stock options as labour income, when they are arguably more akin to capital income.

  • Although we would argue that the value of stock options should be fully taxed as employment income rather than partially taxed as a capital gain.

  • While the originating post was flawed in many ways, the discussion following it was quite useful in terms of wealth vs income, what’s counted in income, and the role of human capital.

    I argued that being rich is about wealth not income. Stephen was measuring the flows — some of which are in the form of traditional returns to capital ownership, some in the form of salaries (Galen Weston and Ed Rogers get paid exceptionally well for running the family business, as well as owning it) — not the stocks.

    And key point missing here is the stunning inequality of wealth distribution, as in the bottom 50% having about 6% of total net worth, and the top 10% having more than half of the total.

    Nick Rowe noted that we could use income as the flow returning to wealth, but if we do that we must count all types of income. For example, most people’s wealth, to the extent they have any, is in the home. So you need to count as income the imputed rental value of owner-occupied housing.

    Stephen’s one point that not all capitalists, ie small business owners, are rich makes sense. But the rich are almost by definition capitalists because you need to have big assets to be rich, which means possession of land and in particular equities.

    Stephen countered that human capital must be included in wealth. But then, counted as wages is labour income capitalists pay to themselves (eg Weston or Rogers) in addition to what they get from dividends and capital gains. This assumption needs to be treated differently as it drives the conclusion.

    Also, what is measured, I think, is realized capital gains not accrued capital gains; the latter is more consistent with wealth. Another big piece is the use of company assets for personal benefit; employer-provided benefits are a form of income not usually measured or counted as income (and certainly not taxed). Why buy the jet with after tax personal income when you can use the company’s (i.e. your’s). Finally, inheritances and gifts would round out the list in terms of including all income.

    That gives you “broad income”, which might be the flow analogue to wealth that would be useful. But given what’s constructed in Stephen’s post, it is better to just think of the rich in wealth rather than income terms, though Kevin Milligan makes the point that age distribution matters.

  • Mr. Weir, wouldn’t it be better to argue that both stock options and capital gains should be fully taxed?

    Hm. This might be taking things pretty far afield, but I might argue that investment income could best be counted as a net thing . . . people borrowing money are paying the returns on someone else’s investment. So if you have a mortgage, or credit card debt, your interest payments represent as it were negative investment income . . . of course the same would be true of capitalist borrowings, but it already is, right? Rich people and corporations get to deduct that sort of expense from their capital gains, not so?

  • Mr. Library Guy, I have indeed frequently advocated including the full, inflation-adjusted value of capital gains in taxable income. But as long as capital gains continue to receive preferential treatment, there is a separate argument for taxing the full value of stock options.

    Marc, you make excellent points. But in broadening the debate to consider wealth, unrealized capital gains, “broad income,” etc., we should not let Stephen get away with some pretty glaring errors regarding conventional income: counting all pension benefits as investment returns and including only half of realized capital gains from the year the stock market crashed.

  • This is such an oddly titled post. “Poor” and “capitalist” does not constitute an oxymoron. Capitalists come in all shapes and sizes and degrees of success…the worst of which get made redundant.

    I realize that was not really the point of the rebuttal post. As far as that goes I have never had a problem understanding why ppl on the pay role of the Cato and Fraser institutes write such junk but why someone would actually sit down and voluntarily write such obfuscating nonsense boggles the mind.

    Most of this is just a rehash of Samuleson’s glib little quip that it does not matter if capital hires the worker or the worker hires the capital. When we get down to such sociologically vacuous debates we really should show them the door. As in stop feeding the raccoons.

    The good news is that both Revenue Canada and the Courts can still tell the difference between workers and owners even if neoclassical economists cannot and some clever capitalists wish they would not (think contracting out).

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