Income inequality damaging Canadian economy

While the rich keep getting richer and the poor get poorer, new research is showing that income inequality is harmful to a country’s economic growth.

Earlier this month, the OECD published a watershed document on income inequality that has gone unnoticed in Canada. The author, Frederico Cingano, argues there is a “sizeable and statistically negative” relationship between income inequality and economic growth.

He also concludes that raising income taxes on the rich can help the situation, rather than reducing growth. This report now echoes similar studies by the United Nations and the International Labour Organization, which all argued that reduced inequality promotes economic growth. So what are we waiting for?

Income inequality has today become the single most important economic issue in Canada and around the world, and one of the main issues that threatens our prosperity in the long run. 

Canada cannot be considered a prosperous country while being witness to the scourge of growing inequality of income and wealth. Governments must now make this issue their top priority or risk seeing our economy bounce around from one economic crisis to another.

In Canada, income inequality has exploded.  For example, in the last three decades the share of income owned by the top one per cent has gone from eight per cent in 1982 to 13.3 per cent in 2010.  After taxes, it went from 6.3 to 9.9 per cent. 

We must put an end to growing inequalities and must take concrete steps today to reduce it, or risk living with permanent lower average economic growth.  

Here are eight simple policies to achieve this end:

1.  Governments must make job creation their mission.  In fact, nothing short of a full employment policy will do.  Since when is unemployment an acceptable social and economic end?

2. We must raise the minimum wage and make sure that it is sufficient for Canadians to live on.  The Canadian Centre for Policy Alternatives estimates that for two working parents with two children, the living wage in Toronto should be $16.60 an hour and $14.07 in Winnipeg, a far cry of where it stands now. Many studies show raising the minimum wage does not hurt employment nor does it cause slower growth.  In fact, the contrary is true. 

3. We should adopt a guaranteed annual income for all working Canadians. There are many variations of this policy, and more work needs to be done to determine the best program for Canada, but the central idea is a sound one.

4. We must implement an inheritance tax, in order to avoid the transfer of tax-free wealth from one generation to another. Canada remains to this day one of the only industrialized countries without an inheritance tax.

5. We must cap corporate annual bonuses. It has become common for corporate CEOs to make six and sometimes seven-figure bonuses. Bonuses are certainly valid in many instances, but the practice has become extreme.

6. We must raise the number of tax brackets and marginal tax rates on higher income. We now have evidence that high or higher taxes on income do not hinder growth. So what’s stopping governments from raising the marginal tax rate on higher income to 60 per cent or even 70 per cent? Canada’s tax system has become considerably less progressive in recent years.

7. We must encourage increased unionization. This will allow workers to be better protected and in general have higher wages and better benefits.

8. We must reconsider taxes on capital gains. We must consider all capital gains as taxable income. 

As the OECD and other reports imply, the days of Thatcher-Reagan trickle-down or voodoo economics are over.  We now know that lower taxes on the rich do not promote growth.

Reducing income inequality is no longer seen as this utopian pie-in-the-sky social ideal, but rather, an instrumental component of prosperity and growth. Hopefully these reports will pave the way toward a much-needed dialogue on inequality in Canada that is long-overdue.

Many will consider these policy proposals as radical, when in fact doing nothing about inequality threatens the very economy we are all trying to save.

What is now missing is the political will. None of the federal parties have committed themselves to a serious discussion of income inequality, except for some media sound-bites. Time is running short. We must demand changes now.

Louis-Philippe Rochon is an associate professor of economics at Laurentian University and the co-editor of the Review of Keynesian Economics.