One Way the Richest 1% Can Help the Other 99%
It’s often said that there aren’t enough rich people in Canada to make a real difference to fiscal policy and, in consequence, the rest of us.
Yesterday Canadian Business’s annual special edition devoted to Canada’s richest 100 people hit the stands, where it will stay until Christmas. As a regular contributor I was invited to submit a column. I chose to drop the T-bomb and show how just a few people can make a huge difference in the lives of millions of Canadians through their contribution to public policy. You can read the article here.
CBC’s Metro Morning and CBC’s Ontario Morning both interviewed me on the topic, which riffed on the significance of the Occupy Wall Street and “The Other 99 percent†movements. The interview is halfway thru this podcast.
The Canadian Business article follows.
A ‘Buffett Tax’ for Canada?
South of the border, there’s a lot of attention being paid to the rich, as President Barack Obama and some wealthy Americans like Warren Buffett call on the most affluent to pay a greater share of taxes in that recession-torn nation. Are there enough of “the rich†to help solve our challenges here? And just what does it mean to be rich?
If your income was more than $150,000 in 2008, you earned more than 98% of Canada’s 25 million tax filers. Don’t think that’s rich? Consider this: a whole 54% of Canadians that year had incomes below $30,000.
But let’s look up—way up. There are roughly 17,000 Canadians earning seven figures annually, and according to data collected by McMaster University’s Mike Veall, today’s millionaires are being taxed at the lowest rates since the 1920s.
What difference could Canada’s wealthiest make if asked to help out a little more? Take, for example, Canada’s 100 highest-paid CEOs. The average chief—let’s call him Larry, and say he lives in Ontario—made $6.6 million in 2009, about a third of that from stock options. When realized, stock options are taxed at half the rate that Canadians pay on employment income. If those options were taxed like any other income, Larry would be paying about another $471,000 in taxes, and still have millions left.
Put Larry and his 99 fellow CEOs together, and they could put almost a 10% down payment on a national program to bring dental care to school kids. Canadians spend more than $13 billion on dental care, and cavities are 100% preventable. Talk about putting our money where our mouths are—the savings would be enormous.
But you don’t need to be a millionaire to make a difference. If the 8,000 Canadians who received stock options as part of incomes over $250,000 paid taxes on this money at the same rate as the rest of their income—treating executive compensation the same way you treat the income of any other working stiff—it would have raised $337 million for federal coffers in 2009, a down year for options.
Now take that argument a little further. Canada’s federal personal income tax rate is 29% on all incomes above $129,000. That’s much lower than the current top rate of 35% in the U.S.—a rate that’s likely to rise. A new bracket that taxed incomes over $250,000 at 32%, lower than the 33% rate applied to that income level in the U.S., would raise about $2 billion. That could pay for the federal share of a national child-care program.
Apply that same 3% increase to the 54% of Canadians who make less than $30,000 and you’d get a measly $154 million.
A 35% tax bracket for Canadians whose income is higher than $750,000—the U.S. top rate, except there it’s applied when your income hits $373,650—would yield $1.2 billion. That, for example, could start to address all our aging nationwide wastewater infrastructure.
There are relatively fewer wealthy people in Canada than south of the border, but it doesn’t take that many of them to make a big difference. The question is: Who will step up and be our Warren Buffett?
The statistical scenarios that you present are provocative. As a part-time student, full-time worker with a family and a mortgage who has bought into the idea of life-long learning, I would be curious to know how the same incremental tax increases you propose would impact the cost of post-secondary and other forms of continuing education. On a personal and purely pragmatic level, the cost of continuing my education must be compared to the benefit (e.g. increased income) that I will receive from it. As a society then, I wonder how increasing the cost of subsidizing continuing or adult education would benefit the overall economy, the assumption being that making adult education more accessible would eventually raise the income of those who participate in it, thus increasing tax revenue in general.
Warren Buffett’s comments, nice guy and wizard investor though he is, are hardly relevant to Canadian taxation, for two reasons:
1) He’s not serious. His complaint, as I understand it, is that because his compensation is not structured as salary, his income tax rate is 17.9%. Since the U.S. top marginal federal rate on salary is 35%, he could solve his problem overnight by restructuring his compensation as salary, or moving to California (which taxes dividends as ordinary income). When he does this, start paying attention to him, not before.
2) Similarly, the top marginal income tax rate on salary in Ontario is over 46%, more than 2.5 times the rate that Warren finds too low. It’s pretty clear that his good tax planning / low tax regime domicile is not relevant to the vast majority of Ontarians and other Canadians, who are already paying a much higher percentage of their income in taxes than he is.
I believe Warren Buffet’s compensation is just $100,000 in salary, with no stock options or bonuses. He makes his money from capital gains and dividends on the stock he owns.
rcp’s comments stand reality on its head. The existence somewhere, somehow, if one tries hard, of tax regimes which will allow the rich to pay tax if they feel generous is hardly a sign that Buffett’s arguments are unsound. He doesn’t have to move to a carefully selected taxation regime; he could simply write the government a cheque, nothing is stopping him. The point is not whether Buffett as an individual feels like being a philanthropist to the government. The point is that the wealthy overall have rules structured to allow them not to pay much tax.
Similarly, the “top marginal income tax rate on salary in Ontario” is only relevant to the issue if people in the top 1% or .1% in fact pay tax at or near that rate. Chances are they don’t.
It’s particularly perverse that rcp then talks about “the vast majority of Ontarians and other Canadians, who are already paying a much higher percentage of their income in taxes than he is.” Dude, that was kind of his point. The issue is not the “vast majority” and what they pay, it is the small minority of the very rich, and what they don’t pay.
@PLG:
“Dude”, indeed. If Warren Buffett thinks that the U.S. system for taxing investment income has loopholes (and although I don’t disagree with him, nobody’s forcing him to use them), that’s not a good argument for higher taxes on employment income in Canada.
I’d be interested in a source for your statement that the top 1% or 0.1% in Ontario don’t pay tax on their salary at the top marginal rate.
I’m pretty sure Warren Buffett would be committing tax fraud if he filed his investment income as employment income on his tax return?
This is an ad hominem attack anyway. What Warren Buffett does or doesn’t do would not make is arguments less valid.
Since salary as such is not the major income component of many among the very rich, and other forms of income of the sorts they normally have is taxed at much lower rates (in come cases only half is taxed at all) I don’t really need a source to point out that the very rich don’t pay much tax at the top marginal rate for salaries.
How much tax they pay on their actual salaries I wouldn’t know, although between RRSPs, those new RRSP-like things, and so on and so forth there’s a lot of room for squirreling away salary into tax-free investments before you even get to the kind of clever stuff you want accountants for. But it’s largely irrelevant. Even if they paid tax on their salaries at the top rate (although it’s very unlikely they do) they still wouldn’t pay tax overall anywhere near that rate.
@ PLG:
Since Armine was talking about raising rates on ordinary income, I stuck with that – and’s it’s still a non sequitur with respect to Warren Buffett’s situation.
And since you have no source to back up your assertion, let me give you one at:
http://ywcacanada.ca/data/research_docs/00000192.pdf
A quote from page 15:
Today the income of the richest 1% is due mostly to the lavish sums they are paid for the work they do.
Gee, rcp, I see much of Armine’s article devoted to the issue of taxing stock options at a rate equal to the rate for income. So you don’t seem to have been “sticking” to anything. Rather, you seem to be lying like a rug.
@ PLG:
1) Your alleged facts about the source of income for the top 1% were wrong. Armine’s article cited above proves it.
2) Moving the top federal rate from 29% to 35% is an increase in tax on ordinary (employment) income.
3) I have no objection to taxing income from employee stock options as ordinary income, but the 2010 budget already made stock options less attractive from a tax and witholding point of view, so that train has left the station. See:
http://www.taxrates.cc/html/1004-canada-tax-changes.html
and have a nice day.
If Canada’s federal personal income tax rate is going to be compared to the US, it should be disclosed that the US state income tax rate is typically in the single digits, which is not the case for any province.
A more appropriate assessment of whether “soak the rich” is good policy would look at a jurisdiction like California that “soaks the rich” (through relatively progressive income taxes, heavy capital gains taxes etc) and then consider its relative fiscal health. In California’s case, social services tend to suffer because the state’s tax revenue is highly volatile. Everything is great when an asset bubble is expanding but the poor suffer when it bursts.
If you want to raise some serious revenue, try a “measly” 2% increase in the GST.
Two Letters to Editor:
Tax idea worth considering
By Larry Kazdan, Ottawa Citizen October 31, 2011
Re: A taxing – but welcome – issue, Oct. 28.
Conservative Finance Minister Jim Flaherty dismisses Brian Topp’s proposals to increase the personal income taxes of the wealthiest Canadians as dreamy nonsense.
But if a new 32-per-cent tax bracket were created on incomes over $250,000, which is still lower than the rate applied to that income level in the U.S., about $2 billion would be raised.
And a small tax on inheritances over $1.5 million would net additional billions. That’s not small change.
It sounds like a lot of sense to me.
Larry Kazdan,
CGA, Vancouver
© Copyright (c) The Ottawa Citizen
http://www.ottawacitizen.com/business/idea+worth+considering/5631175/story.html
Levelling the field
Re: Reasons to tax the rich (Sept. 24).
The Economist is worried that more taxation will decrease economic productivity. So how about a sharp tax on inheritances over $5 million?
This would force those seeking super fortunes to actually earn it on their own, and to let each generation of entrepreneurs begin competing on a more level playing field.
Larry Kazdan
Vancouver
Republished from the Winnipeg Free Press print edition September 29, 2011
http://www.winnipegfreepress.com/opinion/letters_to_the_editor/130764963.html