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Towards a Better Understanding of in Canada Inequality Income Understanding of a Better Towards Towards a Better Understanding of Income Inequality in Canada Income Inequality in Canada n recent years, income inequality has become one of the most animating— Edited by Charles Lammam I and unfortunately most misunderstood—economic and social issues of our time. Incomplete and simplistic analysis is at the heart of the misunderstanding. As the chapters in Towards a Better Understanding of Income Inequality in Canada reveal, the topic is much more complicated than it first seems. The chapters in this book address the following aspects of inequality: • How income and wealth are earned must be taken into account in any discussion about income and wealth inequality. In countries like Canada, inequality is largely merit-based because it generally comes from entrepreneurs providing goods and services to others (chapter 1). • Income inequality has not been growing rapidly in Canada when inequality is measured properly (chapter 2). For example, earnings (wages and salaries) represent a narrow definition of income, yet this measure ignores a number of critical factors including government transfers (welfare, Old Age Security, etc.) to low-income families. • Furthermore, inequality in the standard of living of Canadians, or consumption inequality (the difference in spending by different households), has barely changed in 40 years (chapter 3). • Wealth accumulation is generally a lifelong process (chapter 4). It happens slowly and steadily over a long period and for that reason, wealth inequality in Canada is largely a function of people’s age. • Just as wealth is accumulated over the course of decades, so too is the level of income that Canadians earn each year. Canada’s high level of income mobility (the mark of a dynamic economy) means that very few Canadians remain stuck in low income. Most move up the income ladder over time (chapter 5). Edited by Charles Lammam • Some assert that the middle class in Canada is stagnating. But this is untrue. Chapter 6 demonstrates that middle-class incomes are up dramatically in Canada since the 1970s and the purchasing power of those incomes goes a lot further today than back then. • Much of the debate around income inequality revolves around perceptions of fairness. Perhaps inequality could be solved if governments simply increased taxes on upper income earners? The fact is that Canada’s top income earners already pay a disproportionate share of taxes relative to the share of income that they earn—and that gap has been increasing over time (chapter 7). Well-intentioned policies designed to address inequality might be doing more harm than good—exacerbating the situation and making it worse, not better. Together, the chapters in Towards a Better Understanding of Income Inequality in Canada fill a void in the public debate and offer a comprehensive analysis of income inequality and the issues surrounding it. NOVEMBER 2017 November 2017 • Fraser Institute Towards a Better Understanding of Income Inequality in Canada Edited by Charles Lammam Contents Introduction 1 1 How Income and Wealth are “Earned” Matters in Understanding Inequality 7 Jason Clemens, Taylor Jackson, and Megan O’Neill 2. Income Inequality Measurement Sensitivities 25 Christopher Sarlo, Jason Clemens, and Joel Emes 3 Consumption Inequality in Canada: Is the Gap Growing? 57 Christopher Sarlo 4 Understanding Wealth Inequality in Canada 78 Christopher Sarlo 5 Measuring Income Mobility in Canada 123 Charles Lammam, Niels Veldhuis, Milagros Palacios, and Hugh MacIntyre 6 The Myth of Middle-Class Stagnation in Canada 160 Donald J. Boudreaux, with Joel Emes, Hugh MacIntyre, and Charles Lammam 7 Measuring the Distribution of Taxes in Canada: Do the Rich Pay Their “Fair Share”? 186 Charles Lammam, Hugh MacIntyre, and Milagros Palacios About the Authors . 199 Acknowledgments . .202 Publishing Information . 203 Supporting the Fraser Institute . .204 Purpose, Funding, and Independence . .204 About the Fraser Institute . .205 Editorial Advisory Board . .206 Introduction In recent years, income inequality has become one of the most animating— and unfortunately most misunderstood—economic and social issues of our time. Sparked by the 2008–09 recession, the well-deserved backlash against corporate bailouts, the Occupy Wall Street movement, and a deluge of reports pointing to a growing problem, income inequality has vaulted to the forefront of the public’s concerns. A recent sign of the popularity of the “growing income inequality” nar- rative is the success of the book Capital in the 21st Century by French econo- mist Thomas Piketty, which became an international bestseller and is one of several analyses that conclude income inequality is rising, with increasingly larger shares of income being concentrated among the highest earners. Such conclusions, however, depend greatly on the data and assumptions being used to measure inequality. Indeed, many prominent international and Canadian researchers continue to use flawed and incomplete data and research methods to fuel concerns of a growing “income gap” and stagnating standards of living. Given the continuous stream of media reports pointing to growing income inequality and stagnating average incomes, it is not surprising that many Canadians have been convinced of the veracity of this perceived problem. Without greater awareness and accuracy about the most important concerns surrounding inequality, policymakers may continue to pursue simple solutions that will ultimately reduce the economic dynamism Canadians have enjoyed, thereby limiting the ability of Canadians to move up the income ladder. This is why we need a better understanding of the true nature of inequality and income growth, including whether inequality is necessarily harmful or can actually be a positive economic force, how challenging it is to measure inequality and how sensitive the inequality measures are to the underlying definitions, whether or not there really is a rapidly growing gap, and the state of income mobility, which is the ability of Canadians to rise out of their respec- tive income group over time and avoid being permanently stuck in the same income groups year after year. The chapters in Towards a Better Understanding of Income Inequality in Canada tackle these important and complex issues and fill a void in the public debate. Together, they offer a comprehensive analysis of income inequality. 2 Introduction The book begins by pointing out that individuals earn income and accu- mulate wealth in dramatically different ways. It is essential that this fact be taken into consideration in any understanding of the nature of income and wealth inequality. In Chapter 1: How Income and Wealth are ‘Earned’ Matters in Understanding Inequality, authors Jason Clemens, Taylor Jackson, and Megan O’Neill explain that when measuring inequality, we can’t simply com- pare countries such as Canada, where typically businesses and entrepreneurs only prosper by benefiting society, to countries where cronyism and govern- ment-granted privileges are more widespread and rig the system to the benefit of elites. In countries like Canada, we expect businesspeople to provide goods or services at prices that consumers are willing to pay. When business is con- ducted this way, the entrepreneur benefits of course, but more importantly, so does society at large. In other words, entrepreneurs are successful in these countries by satisfying the wants and needs of the population. This situation contrasts markedly with that in other countries where peo- ple can amass great wealth while producing negative consequences for society. For example, in Mexico, “cronyism” and special privileges that government grants to individuals and businesses reduce competition and create monopo- lies. Consequently, some Mexican companies are able to charge higher prices for goods and services (telecommunications, for example) than consumers would see in a competitive market. In Canada, some companies do receive special privileges and government subsidies, but inequality arises largely from the success that some business- people reap through their entrepreneurship, innovation, and hard work. This largely merit-based inequality serves not only the people who create the wealth, but also those who buy and use the goods and services. Before determining how much any society should worry about inequality, citizens should first understand that the way income and wealth are earned is a critical component of the discussion. In Chapter 2: Income Inequality Measurement Sensitivities, authors Christopher Sarlo, Jason Clemens, and Joel Emes come to the conclusion that, when inequality is measured properly, income inequality has not been growing rapidly in Canada. Specifically, they find that in this country, between 1982 and 2010 (the latest year of comparable data), the share of income that the top 10 per- cent of Canadian families earned increased by 12.9 percent. That is a much more modest increase in inequality than has been suggested by other studies that tend to ignore the role of taxes and government transfers in mitigating income inequality. When income inequality in Canada is measured improperly, discussions about it are incomplete and misleading. For example, earnings (wages and salaries) represent a narrow definition of income, yet many researchers use only earnings to measure income inequality. This measure of income ignores a number of critical factors including government transfers

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