Wednesday, December 18, 2013

The Tax Privileges of the Canadian Wealthy

 A capital gain is a realized benefit resulting from the disposition of an asset (buy low, sell high … unless you are a short seller, in which case you should buy high and sell low). Realized capital gains fluctuate greatly, depending on the ups and downs of the stock market and other macroeconomic forces. For that reason, many analysts exclude them from regular income distribution calculations. However, the reality is that for wealthy Canadians, capital gains are always -- even in bad years -- a substantial source of income. Receipts of realized capital gains are among the most precariously unbalanced sources of income in our economy. And making matters worse, capital gains receive highly preferential treatment under the tax system (in general, only half of realized capital gains need be declared on income tax returns  justified as "incentives to save" and similar arguments).

 The income share of the wealthy top 1 per cent's share of total income in Canadain 2011 in Canada, was at 10.6 percent. This income share statistic does not include capital gains in the calculation of incomes and income shares. Include capital gains in the  analysis of income distribution and then market income with capital gains, t the income share of the top 1 per cent in 2011 was significantly higher than the headline number reported: 13.2 per cent of total income. Over the last 5 years, capital gains have accounted for about 12 per cent of the total market income of the top 1 per cent, and about 15 per cent for the top 0.1 per cent and 0.01 per cent. So excluding capital gains significantly understates the total income received at the top of the income ladder.

 The average capital gains received by tax-filers  in the richest 0.01 per cent category received, on average, over $1.1 million worth of capital gains each. Those in the richest 0.1 per cent received $300,000 each, and those in the top 1 per cent received $60,000 each. To put this in context, the richest 1 per cent of the population received more than twice as much income from capital gains alone, as the median total income of the bottom 99 per cent of society (which was $29,300 in 2011). The top 1 per cent has consistently claimed about half of all capital gains, implying that about half of the underlying wealth is also owned by that group. And half those lucrative capital gains could be simply ignored when it came time for the 1 per cent to file their tax returns.  The average capital gains income received by a tax-filer in the bottom 50 per cent of the income ladder equaled all of $100 in 2011.

Wealthy Canadians pay tax on only half of the income they derive from flipping stocks, bonds, and real estate -- while fast food workers pay tax on every dollar of the hard-earned income they derive from flipping burgers.

 It is very wrong to assume (as some liberals do) that the wealthy are just like the rest of us, only richer -- and hence that the dangers of income inequality stem solely from the quantitative gap in bottom line incomes (and the comforts and opportunities that those incomes allow for). Wealthy individuals are fundamentally and qualitatively different from the rest of us. In particular, they own most business wealth in Canada (both direct ownership of businesses, and ownership of business equity). That's precisely why they receive the lion's share of capital gains. This dominant ownership position is obscured by the rhetoric of "people's capitalism" -- but confirmed in gory detail by the data on the maldistribution of capital gains (and other wealth-related income flows, such as dividend payouts which are almost as badly concentrated at the top of the income ladder). Wealthy people are not just wealthy. They are the major owners and top managers of the profit-driven businesses which are the major driving force of the economy. This gives them a power, and a vested interest, that goes beyond their claim to a vastly disproportionate share of incomes. And in turn, that power helps to explain why their incomes receive such favourable taxation treatment, and other government favours.

Taken from an article by Jim Stanford on the Z-Com website

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