Capital Gains and the Incomes of the Wealthy

Yesterday’s release from Statistics Canada on the income share of the wealthy generated some interesting coverage and commentary.  It reported that the top 1%’s share of total income in Canada remained steady in 2011 in Canada, at 10.6 percent — but still significantly higher than in the 1980s.

Most observers did not mention, however, that this oft-cited income share statistic does NOT include capital gains in the calculation of incomes and income shares.  A capital gain, of course, is a realized benefit resulting from the disposition of an asset (buy low, sell high … unless you are a short seller, in which case you should buy high and sell low!).

Realized capital gains fluctuate greatly, depending on the ups and downs of the stock market and other macroeconomic forces.  For that reason, many analysts exclude them from regular income distribution calculations.  However, the reality is that for wealthy Canadians, capital gains are always — even in bad years — a substantial source of income.  Receipts of realized capital gains are among the most precariously unbalanced sources of income in our economy.  And making matters worse, capital gains receive highly preferential treatment under our tax system (in general, only half of realized capital gains need be declared on income tax returns — an extraordinary and arbitrary loophole that is usually justified with neoclassical mumbo-jumbo about “incentives to save” and similar self-serving arguments).

For all these reasons, I think it is better to include capital gains in our analysis of income distribution.  StatsCan’s CANSIM Table 204-0001 allows us to do that, providing options for selecting market income and total income with or without capital gains included.

If we consider “market income with capital gains,” then the income share of the top 1% in 2011 was significantly higher than the headline number reported yesterday: 13.2% of total income, down a notch from 2010, but about 5 percentage points higher than in the early 1980s (when StatsCan started collecting this information).  For the richest of the rich, the top 0.1% took in almost 5 percent of total income (no change from 2010, but more than double the shares of the early 1980s), and the richest 0.01% took 1.7% (likewise).

For “total income.” the top income shares (including capital gains) are reduced slightly (by virtue of government transfers received disproportionately by lower-income tax-filers): to 11.7% for the top 1%, 4.3% for the top 0.1%, and 1.5% for the top 0.01%.  But regardless of the income concept used, the extent of income concentration is significantly higher when capital gains are included.

Over the last 5 years, capital gains have accounted for about 12% of the total market income of the top 1%, and about 15% for the top 0.1% and 0.01%.  So excluding capital gains significantly understates the total income received at the top of the income ladder.

Another way of making this point is to calculate the average capital gains received by tax-filers at different income levels (a figure which can be derived from the Table 204-0001 data).  Those in the richest 0.01% category received, on average, over $1.1 million worth of capital gains each.  Those in the richest 0.1% received $300,000 each, and those in the top 1% received $60,000 each.  To put this in context, the richest 1% of the population received more than twice as much income from capital gains alone, as the median total income of the bottom 99% of society (which was $29,300 in 2011).

The top 1% has consistently claimed about half of all capital gains, implying that about half of the underlying wealth is also owned by that group.  (The role of pension fund wealth and other forms of wealth which do not generate taxable capital gains would serve to dilute that ownership share somewhat.)

And half those lucrative capital gains could be simply ignored when it came time for the 1% to file their tax returns.  If there was ever a reason for revolution in the streets, it should be the fact that wealthy Canadians pay tax on only half of the income they derive from flipping stocks, bonds, and real estate — while fast food workers pay tax on every dollar of the hard-earned income they derive from flipping burgers in greasy, dangerous kitchens.

Of course, in today’s “shareholder economy.” we can all play the markets through our mutual funds, RRSPs, and soon (if the Harper government has its way) PRPPs.  So surely more humble Canadians must also benefit from capital gains and their preferential tax treatment.  Just not to quite the same degree.  The average capital gains income received by a tax-filer in the bottom 50% of the income ladder equaled all of $100 in 2011.  (StatsCan rounds average and median income estimates to the nearest 100.)  Adding insult to injury, the puny effective tax saving to those tax-filers from the capital gains partial inclusion (worth $7.50 in federal taxes at the 15% marginal rate) was only half the effective savings pocketed by the top 1% tax-filers (realized at a 29% rate) on EACH $100 of their capital gains partial inclusion (which was then applied against a capital gains flow that was 600 times larger).  The system of capital gains partial inclusion thus benefits the average 1% tax-filer an incredible 1160 times as much (through an average $8700 saving on federal tax alone) as for the bottom 50% tax-filer (average $7.50 saving at most, assuming the tax-filer was paying any income tax at all).

Maybe the “shareholder economy” is not all it was cracked up to be, after all.

There is a moral dimension to considering capital gains, since it is a form of income derived from ownership, rather than through direct work effort.

Capital gains are also worth emphasizing in discussions of income distribution because they reveal an important qualitative difference in the role that the wealthy play in our economy.  It is very wrong to assume (as some liberals do) that the wealthy are just like the rest of us, only richer — and hence that the dangers of income inequality stem solely from the quantitative gap in bottom line incomes (and the comforts and opportunities that those incomes allow for).  Wealthy individuals are fundamentally and qualitatively different from the rest of us.  In particular, they own most business wealth in Canada (both direct ownership of businesses, and ownership of business equity).  That’s precisely why they receive the lion’s share of capital gains.  This dominant ownership position is obscured by the rhetoric of “people’s capitalism” — but confirmed in gory detail by the data on the maldistribution of capital gains (and other wealth-related income flows, such as dividend payouts which are almost as badly concentrated at the top of the income ladder).  Wealthy people are not just wealthy.  They are the major owners and top managers of the profit-driven businesses which are the major driving force of our economy.  This gives them a power, and a vested interest, that goes beyond their claim to a vastly disproportionate share of incomes.  And in turn, that power helps to explain why THEIR incomes receive such favourable taxation treatment, and other government favours.


  • I cannot believe the ignorance and bias on this with Statistics Canada- I mean come on people lets get with the times- you are operating a Statistical agency like we are living in the 1950’s- this is indeed the 21st century- income polarization is a massive issue, and to report on income like the manner that this article did is just out right garbage!! Come on people of statcan- can we at least get inside the neutrality somewhat? That is pathetically banana republic statistical reporting and you are becoming an embarrassment to this country!!

    The world we live in has changed much since the 50’s. Incomes of the top are now mainly made from speculative investments- not productive investment- so capital gains have got to be part of the top ends icnome stream- it is bad enough we tax them at such low rates- when we can get them to even report in Canada that is, as most times it is in some tax haven island country.

    We do need a envisioning at Statistics Canada- from Income streams, to reporting employment statistics and the whole cancellation of the mass of statistical social surveys. I will say this, those in the barn had better think about the political winds and how they are about to change in 2015. There will be a barn clearing- and names will be named.

  • By coincidence, the Parliamentary Bidget Office released a report yesterday about the fiscal effects of tax policy changes:
    See the Appendix. They say a 5-point reduction in the capital gains inclusion rate costs $420 million. Thus the total 50% exemption at present costs $4.2 billion per year.
    Interestingly, that jives perfectly with Finance Canada’s estimate of the cost of the loophole, which they also pegged at $4.2 billion in 2012. See their annual Tax Expenditures report, Table 1, p.17:

  • I realize it’s not readily measurable, but I still think it’s worth noting that even this understates the situation, very likely significantly. The capital gains we measure is only the stuff the 1% haven’t successfully squirrelled away in tax havens or otherwise avoided declaring. The limited information we have suggests that the missing amount is at least as large as what the likes of Stats Canada or the CRA get to see, and growing more rapidly.

  • Sorry about the rant above- but I was quite upset reading this article and the silences that I have know to be missing for years- that I had been fighting for internally- somewhat of a pent up supply I guess.

    The fact of the matter remains, if you are going to look soberly and strive for an unbiased approach, one must start measuring the top end of the income stream with a whole lot more intelligence and desire.

    A couple of add on points that need to be addressed-

    1) we need to include capital gains as Jim mentioned.

    2) we need better access to information to those at the top end, in fact a whole special section needs to be created for high income estimates, as it stands now, tax data is not enough.

    3) we need a proper accounting and estimate of unreported income at the upper end. Just because people hide money off shore, does not mean we should not somehow try and estimate it for inclusion

    4) We also need to marry up the various income streams of the wealthy as they are voraciously unreported- from dividends payouts, to expense claims, earned income and the multitude of ways the wealthy report there income, we need to have a more holistic approach in measuring the 1%.

    Sadly it is a political hot potato inside Statistics Canada. I worked on the Income survey for a handful of years, and it is mired in dated ideas, methods and sadly underfunded. Nobody has the will nor the fortitude to take it on, so it blows in the wind and revenue Canada is the default assigned to define wealth.

    It is part of the political economy of statistics that we all have learned so much about since Harper trashed the census of 2011.

    Potentially that is one of the positive outcomes and services that Harper performed- it starts exposing some of the surface warts- if only you could see what I saw! It is amazing what we take as fact is all I can say for now. Statistical culture has its roots in the Frankfurt school – there is not a doubt in my head. It starts with the premise of the eternal solution of sending out surveys that never get filled. And ends with so much detail and dedication to imagery of fact. Not sure if I am able to impute the middle part of that story- I have to check my legal status.

    I guess the question in my head is, if that is the process, then maybe the facade of the 50’s is a good thing, as it will rust a lot quicker and fall down much louder.

Leave a Reply

Your email address will not be published. Required fields are marked *