Income inequality has become a hot topic in recent years, with many arguing that it poses significant threats to various aspects of society. In Canada, this debate has been intensified by Dalhousie University economics professor Lars Osberg’s book, “The Scandalous Rise of Inequality in Canada.” His central thesis contends that rising income inequality threatens various dimensions of society, including economic growth, financial stability, social mobility, democracy, and even the climate. However, economist and senior fellow at the Fraser Institute, Philip Cross, offers a critical analysis of Osberg’s assertions, challenging the notion that income inequality is as detrimental as claimed.
The Central Argument: Income Inequality as a Threat
Osberg paints a comprehensive picture of income inequality being the root of many systemic problems. He argues that the increasing income share of the top one percent significantly contributes to escalating inequality, which in turn threatens the country’s economic and social fabric. According to Osberg, this concentration of wealth within a small elite is a driving factor behind various societal issues, including declining social mobility and weakening democratic structures. In his book, he lays out a scenario where inequality exacerbates multiple crises, making it a topic of urgent concern for policymakers.
However, Cross counters this narrative by scrutinizing the data used by Osberg and the conclusions derived from it. He emphasizes the importance of critically examining the facts surrounding income inequality in Canada, suggesting that while the scenarios presented by Osberg are alarming, the reality might be different upon closer inspection. Cross argues that a methodical analysis of the situation is essential for an accurate understanding of income inequality’s real impact on society.
Examining the Data: Income Share of the Top One Percent
One of Cross’s main critiques is Osberg’s focus on the income share of the top one percent and its dramatic increase. Osberg posits that this significant rise in income among the top earners is a primary driver of growing inequality. However, Cross challenges this by pointing out that Osberg’s analysis largely depends on data from the U.S., which might not be wholly applicable to the Canadian context. This could lead to a misrepresentation of the Canadian situation if American data are inappropriately generalized.
Cross highlights Canadian-specific data, noting that the income share of the top one percent in Canada has actually been on the decline since 2007. Whether considering market income, total income, or after-tax income, the statistics indicate a decreasing trend for the top one percent’s income share. This contradicts Osberg’s claims and suggests that the reality in Canada might be less severe than depicted. Cross asserts that this discrepancy points to the necessity of using accurate and contextually relevant data when addressing complex issues like income inequality.
The Real Economic Challenge: Lack of High Earners
According to Cross, the true economic challenge for Canada is not an overconcentration of wealth among a small elite, but rather the relative scarcity of high earners compared to other leading economies like the United States. He notes that the median income of Canada’s top one percent is notably smaller than that of their U.S. counterparts. This disparity, he argues, indicates a lack of highly lucrative opportunities in Canada rather than an overwhelming presence of high-income individuals dominating the economic landscape.
Cross suggests that addressing this issue—creating more high-income opportunities—would be more beneficial for Canada’s economic health than focusing solely on income inequality. By fostering an environment that generates and rewards high earners, Canada could boost its overall economic performance and competitiveness. This approach could also help in reducing income inequality by lifting more people into higher income brackets, thereby creating a more balanced economic structure.
The Impact of Tax Policies on the Wealthy
Among the most contentious points in the discussion of income inequality is the policy of increasing taxes on the wealthiest individuals. Cross acknowledges the populist appeal of this strategy but emphasizes its limitations and potential negative effects. He points out that the top one percent already contributes a substantial portion of income taxes—22.1% as of 2022. Additionally, past high-ranking officials like former finance minister Bill Morneau have expressed regret over supporting tax increases on the wealthy. Morneau reflected on how such policies might have hindered constructive dialogues with investors crucial for research and development, which are essential for national progress.
Cross delves into Morneau’s reflections, highlighting that higher taxes on the rich dampened business confidence and might have stunted further economic investments and opportunities. This supports Cross’s argument that while increasing taxes on the wealthy may seem like a straightforward solution, it carries significant risks and can result in reduced economic dynamism. Hence, rather than focusing on punitive measures, it would be more productive to consider policies that encourage investment and economic growth.
The Role of High Net-Worth Individuals
Before taking on her role as finance minister, Chrystia Freeland acknowledged the importance of ultra-high net-worth individuals as entrepreneurs whose contributions are vital to the economy. Cross highlights this perspective, emphasizing that these individuals play multi-faceted roles beyond mere wealth accumulation. High net-worth individuals drive innovation, create jobs, and contribute substantially to the economic fabric. Therefore, their role in the economy should be recognized and not overlooked in the broader discussion about income inequality.
Cross stresses that Osberg’s focus on income inequality diverts attention from more pressing economic issues like poverty reduction and middle-class growth. This viewpoint is echoed by Gerald Butts, former principal advisor to Prime Minister Trudeau, who contends that concentrating excessively on inequality risks portraying economic growth and prosperity as inherently harmful. This diversion could lead to policy decisions that fail to address the root causes of economic disparities and potentially hinder overall progress.
Financial Practicalities and Tax Competitiveness
Cross also addresses the practical financial implications of Canada’s tax policies. He notes that Canadian personal income tax rates are not competitive with those in the U.S., making it difficult to attract and retain highly skilled labor. This lack of competitiveness could stymie economic growth by discouraging talent from remaining in or moving to Canada. Furthermore, he highlights that raising taxes on the wealthy is unlikely to generate significant revenue due to the relatively small number of high-income earners in the country.
According to Cross’s calculations, even if the government were to confiscate all income above $200,000 from the top one percent, it would only fund federal spending for a mere 44.2 days. This one-time benefit would eliminate future incentives for economic productivity from these earners, creating a more complex and challenging economic landscape. The argument underscores the importance of considering long-term impacts and the broader economic context when crafting tax policies.
Misinterpretations of Economic Contributions
Income inequality has been at the forefront of societal debates in recent years, with many claiming it poses significant threats to different facets of life. In Canada, this discussion has been notably influenced by Dalhousie University economics professor Lars Osberg and his book, “The Scandalous Rise of Inequality in Canada.” Osberg argues that increasing income disparity endangers multiple areas of society, including economic growth, financial stability, social mobility, democracy, and even the environment. He contends that the widening gap between the rich and the poor can lead to adverse consequences that ripple across the country.
However, not everyone agrees with Osberg’s bleak outlook. Philip Cross, an economist and senior fellow at the Fraser Institute, provides a counter-argument to Osberg’s claims. Cross critically analyzes Osberg’s assertions, questioning the extent to which income inequality truly harms society. He challenges the idea that income inequality is as damaging as Osberg suggests, pointing out that other factors could have more significant impacts on economic and social outcomes.
The debate between these two viewpoints highlights the complexity of the issue and underscores the need for a nuanced understanding of the impacts of income inequality on society. Both perspectives contribute to a broader discussion on how best to address economic disparities and ensure a more equitable future for all.
