October, 2014 Milligan: Inequality trends in Canada 1 Inequality - - PowerPoint PPT Presentation

Milligan: Inequality trends in Canada 1

Inequality in Canada: Trends and Policy Options

Kevin Milligan Vancouver School of Economics University of British Columbia kevin.milligan@ubc.ca October, 2014

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Inequality in Canada: Outline

Why should we care? What are the trends? i) Low-income ii) Median incomes iii) Earnings stagnation iv) Income concentration at top What are some policy options? i) Taxes: Raise rates ii) Taxes: Tighten base iii) Reverse unionization slide iv) At the top: Corporate governance? v) Boost the middle: Education for the long run

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Inequality in Canada: Why Care?

Many people care a lot about issues like:  Fairness: luck, reciprocity, there but for the grace of God go I…  Social exclusion, equality of opportunity.  Political influence of money: not as large an issue in Canada as US… But even if you don’t care about the above, consider:  Need middle class to buy into pro-growth policies like international trade, efficient tax policies.

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Inequality in Canada: Four trends

Two of these trends suggest: ‘this isn’t a problem’… i) Low-income levels are improving ii) Median incomes are growing …but digging deeper reveals some cause for concern. iii) Earnings stagnation iv) Income concentration at top

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Trend #1: Low income proportion not getting worse…

11.6 14.5 9.0 12.7 12.1 13.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 1976 1981 1986 1991 1996 2001 2006 2011 Proportion under cutoff Year

Low Incomes 1976-2011

LICO LIM 1980 1995 2010

Source: CANSIM 202-0802

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Trend #2: Median incomes moving up

$57,000 $49,600 $57,000 $49,500 $42,200 $50,800 $46,300 $40,400 $42,700 $23,100 $25,800 $31,700 $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 1976 1981 1986 1991 1996 2001 2006 2011 2011 Canadian Dollars Year

Median Incomes 1976-2011

Family Before Tax Family After Tax Male Before Tax Female Before Tax 1980 1995 2010

Sources: CANSIM 202-0101 CANSIM 202-0401 CANSIM 202-0601

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Trend #3: Earnings polarization hitting median males

$42,700 $35,600 $36,000 $19,600 $20,700 $24,600 $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $45,000 $50,000 1976 1981 1986 1991 1996 2001 2006 2011 2011 Canadian Dollars Year

Median Earnings by Sex, 1976-2011

Males Females 1980 1995 2010

Sources: CANSIM 202-0101

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Trend #4: Income concentration at the top

What is ‘the top 1%?’ Income (2010) you need to be in the top…

Group Income needed Percentile Top 0.01 percent 2,571,300 P99.99 Top 0.1 percent 685,000 P99.9 Top 1 percent 201,400 P99 Top 5 percent 104,600 P95 Top 10 percent 81,200 P90 Top 50 percent 28,800 P50

Total individual income

Income shares: How much of the total pie of income goes to people in each of these groups?

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Top income shares (individual before tax), indexed to 1982=100

75.0 100.0 125.0 150.0 175.0 200.0 225.0 250.0 275.0 300.0 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 P99.99+ P99.9-P99.99 P99-P99.9 P95-P99 P90-P95

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Growth in Real Individual Before-Tax Income, 1982-2011

Notes: The source is CANSIM series 204-0002, which is based on taxfiler data. Graphed is the percent growth between 1982 and 2011. The income measure is total income before capital gains, and the data are inflation adjusted by the all-items CPI.

1% 15% 7% 16% 27% 54% 102% 157% 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% Median Mean Bottom 90 90 to 95 95 to 99 99 to 99.9 99.9 to 99.99 Top 0.01 Percent Growth 1982-2011 Part of income distribution

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Income concentration: driven by employment income

Source: Veall (2012) 46% 65% 34% 63% 27% 65% 34% 13% 32% 9% 20% 2% 20% 22% 34% 28% 53% 34% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1946 2009 1946 2009 1946 2009 Top 1% Top 0.1% Top 0.01% Share of Income Wage Business Capital

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Policy responses: Fight or Adapt?

What’s hurting the middle?  Trade, technology hurting routine, manual jobs. (David Autor, MIT)  Happening in US, UK, Canada, elsewhere. Should we fight to reverse trade and technology?  Not sure it’s desirable: the engines of growth; brings great benefits.  Not possible: no time machine; cannot ‘uninvent’ the internet. Instead, focus should be to adapt to the world we have.

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Policy option #1: Raise high tax bracket rates

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Policy option #1: Raise high tax bracket rates

Top rates in each province (2014). Remember: federal top rate is 29%...

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Policy option #1: Raise high tax bracket rates

Evidence:  Higher earners don’t work less; not very likely to move.  High earners are likely to talk to their accountants and shift income

• Should we assume those with access to best tax advice fail to heed it?

Example: Moving top federal bracket from 29% to 35%  ‘no response’ revenue estimate is $3B.  But if some income leaks away, this would be cut by half.  2013-14 federal spending budgeted at $282.6B.

• $3B wouldn’t go very far at all in compensating middle for lack of growth.

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Policy option #2: Tighten the tax base

Rather than raise rates, tighten the definition of taxable income by closing loopholes.  Possibly more widespread appeal—people paying their ‘fair share’.  For federal government, constant ‘whack-a-mole’ with tax planning industry. Two examples:  Alberta Family Trust allows income to shift to a trust resident in Alberta.  Favourable taxation of stock options.

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Policy option #3: Reverse Unionization Slide

Unionization in Canada has fallen (although not as much as US)  Mostly driven by private sector declines.

Men 30.8 Women 31.6 Men private 21.7 Men public 72.9 Women private 13.5 Women public 74.9 10 20 30 40 50 60 70 80 90 1980 1985 1990 1995 2000 2005 2010 Proportion of employees in union jobs Year

Unionization 1980-2012

Source: CANSIM 279-0025 CANSIM 282-0078

2010 values

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Policy option #4: Corporate governance

Much of the action at the very top is driven by executive compensation.  A board of directors is choosing to pay these employees well.  Are shareholders getting a good deal? Randall Morck (U o fAlberta): “…shareholder democracy in Canada is remarkably stunted compared to that in the United States and United Kingdom…” Caveats:  Cutting executive pay would benefit shareholders. Not clear this gives big shift to income distribution.  If executive pay pressure is driven by US, Canada may suffer from unilateral

• action. How to recruit the best executives here?

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Policy option #5: Education

Returns to education continue to be very high—and growing.  Raw BA-High School wage gap of 40% in 2005; 32% in 1980 (Boudarbat, Lemieux Riddell 2010)  The ‘education bubble’ or ‘BA-rista’ glut story is pervasive in news coverage.

• 25 year olds may have it tough—my hunch is media should interview more 40

year olds with BA vs High School…. Not exclusively about producing more university graduates  Personal services, cognitive non-routine.  Trades, improving HS completion.  Archetype of a job that will not be outsourced: plumbers.

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Summary

Are things really so bad?  Bottom end is not getting worse.  Median incomes growing for last 15 years. Large, fundamental shifts in labour market can’t be ignored:  Polarization of labour demand.  Concentration of income at top.  Not all ‘dark clouds’! Demand for non-routine, cognitive, creative labour remains strong Best policy options:  Tax base tightening  Corporate governance  Education

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References

Autor, David (2010) “The Polarization on Job Opportunities in the US Labor Market: Implications for Employment and Earnings,” Center for American Progress and The Hamilton Project. [link] Brahim Bodarbat & Thomas Lemieux & W. Craig Riddell (2010), “The Evolution of the Returns to Human Capital in Canada, 1980-2005,” Canadian Public Policy, Vol. 36, No. 1, pp. 63-89. [link] Fortin, Nicole, David A. Green, Thomas Lemieux, Kevin Milligan, W. Craig Riddell (2012), “Canadian Inequality: Recent Developments and Policy Options” Canadian Public Policy, Vol. 38, No. 2, pp. 121-145. [link] Frenette, Marc, David A. Green, and Kevin Milligan (2009), "Taxes, Transfers, and Canadian Income Inequality" Canadian Public Policy, Vol. 35, No. 4, pp. 389-411. [link] Frenette, Marc, David A. Green, and Kevin Milligan (2009), " The tale of the tails: Canadian Income Inequality in the 1980s and 1990s," Canadian Journal of Economics, Vol. 40, No. 3, pp. 734-764. [link] Milligan, Kevin (2013) “Income Inequality and Income Taxation in Canada: Trends in the Census 1980-2005” University of Calgary School of Public Policy Research Paper Volume 6, No. 24. [link] Morck, Randall (2010), “Shareholder Democracy in Canada,” University of Alberta School of Business. [link] Saez, Emmanuel, Joel Slemrod, and Seth H. Giertz (2012), “The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review,” Journal of Economic Literature, Vol. 50, No. 1, pp. 3-50. [link] Veall, Michael R. (2012), “Top income shares in Canada: Recent trends and policy implications,” Canadian Journal of Economics, Vol. 45, No. 4, pp. 1247-1272. [link]