An unhelpful analysis of income inequality in Canada

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Dalhousie University economics professor Lars Osberg has just published The Scandalous Rise of Inequality in Canada. His central theme is that inequality threatens economic growth, financial stability, social mobility, democracy and even the climate. At times, it seems every imaginable problem can be blamed on inequality — which makes it even more important to get the facts about inequality right.

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In the chapter of the book on people at the top of the income distribution, Osberg claims that “the income share of the top one per cent … is the aspect of inequality that has changed the most in recent years.” But the chapter only presents data from the U.S., where the startling success of technology firms such as Facebook, Apple, Alphabet, Microsoft and Nvidia has driven a select number of incomes sky-high. The book’s title says it’s about Canada, but in this chapter Canadian data do not appear even though they are readily available from the World Inequality Database, where Osberg sources his data for the U.S. In fact, in this country the one per cent’s share of income has fallen since 2007, whether you look at market income, total income (earnings plus government transfers) or after-tax income.

Canada’s real problem regarding high-earners is that we do not have enough of them, not that they are gobbling up income at everyone else’s expense. Moreover, our top one per cent don’t earn nearly as much as their counterparts in the U.S. Their median income of $388,200 isn’t even half what you need to belong to the U.S. one per cent. Implying that Canadian and American incomes are equally skewed is yet another example of importing narratives without examining whether they apply here.

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Hiking taxes on the richest one per cent, which is what all this is leading to, has undeniable populist appeal. But the top one per cent already pays 22.1 per cent of all income taxes (or did in 2022, the latest year for which data are available). Former finance minister Bill Morneau wrote in his 2023 memoir that he came to “regret supporting the idea of a tax increase on the one per cent” because “it began a narrative that made it difficult to have a constructive dialogue with the people prepared to invest in research and development to benefit the country … Our proposal’s biggest impact was to reduce business confidence in us.”

Before she became finance minister, Chrystia Freeland acknowledged that “many of the ultra-high net-worth individuals flourishing in today’s global economy are admirable entrepreneurs, and we would all be poorer without them.” People like Osberg who focus on inequality instead of poverty or the middle class also have to confront the objection posed by Gerald Butts, former principal advisor to Trudeau, that doing so “implies that growth in and of itself is a bad thing … (and) people making money in and of itself is a bad thing.”

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Another practical consideration for Morneau was that “Canada’s personal income tax rates are not competitive with the U.S. where highly skilled labour is concerned.” He also acknowledged that taxing the rich in Canada will not raise much money, because “the number of taxpayers affected will be quite small … the math just doesn’t work.” My own calculation is that confiscating all the income of the one per cent above $200,000 would fund total government spending in Canada for 44.2 days — and only once, since a marginal tax rate of 100 per cent provides no further incentive to go out and earn it again.

Besides exaggerating the importance of Canada’s one per cent, Osberg twice claims that “income from capital … is roughly half” of Canada’s GDP. Just last week, Statistics Canada estimated labour income’s share of GDP to be 51.3 per cent, while corporate profits garnered 26.0 per cent (including profits reaped by government-owned businesses through their monopolies on utilities, gambling, and alcohol sales). Another 12.6 per cent was mixed income earned by farmers and small businesses, which Statcan cannot disentangle between labour and capital. The final 10.2 per cent went to government taxes on production and imports, which clearly is not a return on capital.

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Among the many evils generated by inequality, Osberg cites the threat to democracy from “the increasing concentration of wealth and economic power in Canada.” If, as that logic suggests, Justin Trudeau’s decade as prime minister was gifted him by our economic elites, they can’t be very happy. Besides eroding Canada’s economic performance and international standing, Trudeau attacked these same elites by raising income taxes on upper incomes, increasing the capital gains tax and knee-capping the oil and gas industry that has produced so much Canadian wealth. If the economic elite really controls our government, they made a poor choice of puppet.

Philip Cross is a senior fellow at the Fraser Institute.

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