April 8, 2019 | Rigged

Three weeks to go. April the thirtieth. Pay your taxes. What a dandy time to reflect on the greatest economic event of our lives. The income gap (as opposed to the wealth gap).

Yes, the pooch-infused GF household does okay. In 2018 I surrendered half what I earned to the government, still leaving enough for geriatric dog food, joint medicine, canine eye drops, ear medication, shots and vaccinations, boarding, dog painkillers, flea/tick pills plus vet bills including X-rays and surgery. Did I mention the $130-a-bag Rx chow? The tax rate for higher-income earners is now over 50% in seven provinces, and close to that in the rest. As you know, the T2 gang’s first act was to slap a new surtax on the 1%ers (above $206,000), which takes another $1.5 billion from the 274,000 people in this category.

(By the way, the average Canadian 1%er is 53 years old, married and earns $307,000 a year. There’s an 85% chance this person is a man. With a spouse. And dog.)

While giving up half your income sucks, nobody weeps for these folks, even though they pay a disproportionate share of the national bill. What’s causing headlines – and political unrest – is the yawning divide between this relatively small group and the rest of society. This is the birthplace of populism. It’s why we have Trump, plus populist movements in France, Britain, Germany, Italy and elsewhere. Lots of people look at the income gap, conclude the system is rigged against them, and vote for people who say they’ll burn it down.

Why the big gulf between what average families make ($71,000) and the others? Lefties think it’s because we exported too many jobs to low-wage countries, so guys can’t support their families any more by making hub caps or dryers. That’s probably true. AI, robotics and automation have eliminated a ton of skilled positions (but created others). Unions are weak and croaking. Corporate pensions are waning, and we seem to have developed a gig economy. It’s complicated.

Politicians have tried to address this by raising taxes on the thin ranks of high income-earners (T2), hoisting the minimum wage (Ontario), giving tax-free money to families (Canada Child Benefit), cutting back on tax shelters (TFSA), whacking the self-employed (no income-sprinkling), subsidizing real estate (equity-sharing mortgages) and mulling a universal income plus new taxes on investments and inheritances. In the US, Trump populism ended up lowering taxes, starting a trade war, sealing the border, draining the swamp and promoting America-first. Clearly politicians are making this up as they go.

Has capitalism failed? Big hedge fund dude Ray Dallio has suggested so (he’s worth $17 billion), saying that without reform there’ll be conflict reminiscent of the 1930s – when ‘strong leaders’ (you know who) emerged to create order from chaos.

Many worry that without reforms of some kind society’s destined to devolve into a war between classes, between developed and emerging economies and between generations (people get wealthier as they age). More income disparity = more social unrest = more populism. Financial stress and anger make people do extreme things, vote for ‘none of the above’ and want instant change. As mentioned yesterday, all this emotion is often a substitute for taking personal action to change things. We all have the same tools for making, keeping and growing money. But when you expect your first house to be better than your parents’ last one, want new wheels plus two vacas a year and get pickled in debt to grab them, you’ve rolled the dice. Don’t expect a vote will fix such recklessness.

Social advocates (like Jagmeet and AOC) say we need more Robin Hood economics, Hoovering the rich and distributing their wealth to the less rich. Righties like the Fraser Institute recoil at that. “Taxes cannot be continually raised on top income earners without economic consequences,” it argues. “Higher tax rates would further erode Canada’s tax competitiveness, discourage economically productive activity, hinder the country’s ability to attract and retain top talent, and dampen the incentives for income mobility. Once that happens, everyone is hurt, particularly those, ironically enough, whom the misguided policies are intended to help.”

Meanwhile a survey by Canada’s accountants suggests that outside of four major cities (Toronto, Montreal, Calgary & Vancouver) the income gap doesn’t really exist. The trouble is 40% of us live there, trapped in high-cost environments where six-figure incomes can’t finance a house.

So there’s no fix for this. Progressives will keep hiking taxes until something breaks. Populists will take us down a stormy path to nationalism and conflict. Millions of people looking at governments to even out wealth will be disappointed. They cannot and won’t do it. But politicians will lie every inch of the way. Surely you have noticed.

The income gap will not be narrowed. No more than the gender gap. Not in this lifetime. But you are completely free to change things in your own world, and that of your family. Tomorrow and each new day we will talk about that. In the meantime, dammit, Bandit gets a job.

Garth Turner April 8th, 2019

Posted In: The Greater Fool

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