Governments should adjust taxes and transfer policies to make Canadian incomes more equal, because it’s better for the economy in the long run, says a new study by TD Bank.
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The study titled The Case for Leaning Against Income Inequality in Canada points out that technology, globalization and the wider gap between rich and poor in the U.S. are all working to increase inequality here.
But author Craig Alexander says rising inequality is bad for the economy – both because it leaves lower income people with less to spend and because it stalls opportunity for children and youth.
“Inequality has risen and it is a concern, because it actually can hamper investment in human skills, it can hamper economic growth. There’s an increasing body of literature that shows that elevated levels of inequality is not just bad for individuals, it’s bad for your economy and your society,” he said in an interview with CBC’s Metro Morning.
He calls for smart policies that improve Canadian productivity and social mobility, among them:
- Investing in policies that improve productivity.
- Investment in skills training.
- Reviewing the tax and income distribution systems.
- More means testing on programs to shift support to families more in need.
- Improving policies around education, early childhood education and health.
Alexander points to the 1990s as the period when income inequality significantly rose in Canada. During that time, governments were dealing with deficits and cut back on spending and on transfers to other levels of government.
1990s bad for equality
When the 1990s ended and government surpluses returned, money did not go back into programs that helped address inequality, he said.
'What worries me the most is the forces that are currently at play that could actually push income inequality higher in the years to come.' - Craig Alexander, TD economist
“Since 2000, inequality in Canada has been relatively flat although we have seen a higher share of income go to the very top earners in the country,” he said.
With new technology came big increases in productivity, but the benefits of those increases go disproportionately to those in upper income levels, he said.
However, if governments give incentives to boost productivity, then there is more chance of the gains going to wage earners, he said.
Inequality is rising across the advanced world, Alexander said, and there is global pressure to widen the gap between rich and poor, as middle-income jobs are shifted to lower-cost jurisdictions.
“What worries me the most is the forces that are currently at play that could actually push income inequality higher in the years to come. What worries me is social mobility, the ability to go from low-income and middle-income in Canada and move up that income scale,” he said.
U.S. income gap wider
Another huge problem for Canada is the wider gap between rich and poor in the U.S., where right-to-work states have driven industrial wages out of the middle-income spectrum, but knowledge workers are paid more. There is pressure on Canadian employers to follow the same pattern, he said.
“The reason there is a debate about whether the middle-class is losing ground is there was a study showing the Canadian middle-class doing better than middle-income Americans. That’s true, but it’s actually a race to the bottom,” Alexander said.
Canada’s resource economy actually provides more middle-income jobs at the current time, he said, but that may not last.
“One of the things I worry about is that commodity booms and real estate booms don’t last forever, one of the reasons I think inequality could rise in the future, if you lose the strength in those sectors, the middle-class in Canada will be under a lot more pressure,” Alexander said.
He said Canada is No. 9 in the world for income inequality according to the Organization for Economic Co-operation and Development, with No. 1 being the most equal country, but after taxes, it is No. 19.