Higher taxes on rich sounds fair — but flat tax on investments may help more

Income inequality is a growing problem. But instead of taxing high-income earners more on their salaries, a flat tax on investments may do more to bridge the gap, a new report suggests

New report suggests flat tax on investments would do more to bridge the wage gap for rich and poor

Income inequality gap

8 years ago
Duration 8:31
A new report suggests instead of taxing high-income earners more on their salaries, a flat tax on investments might be more helpful

Tonight's first order of business — How to resolve the growing inequity between rich and poor, as an old idea gets a new twist. Think tank C.D. Howe suggests taxing income from work differently than income from investing, and imposing a uniform flat tax on that investment income.

The appeal, they say, is fewer wealthy investors will avoid paying tax, another reminder that income inequality is increasingly driven not by paychecks, but investments. It's less upper class and lower than investor class and worker.

— Amanda Lang

It's sometimes said to be one of the greatest threats to Canada's economy. The rich-poor gap has grown steadily for the last 30 years, and though not as stark as in the United States, shows little sign of slowing. Those raising the alarm over income inequality say the country's policymakers are at a crossroads — do something about it now, or let the middle class disappear.

In a paper released by the C.D. Howe Institute, Kevin Milligan of the University of British Columbia points out Canada's tax system was developed in the 1960s. Since then, the incomes of the top one-tenth of a percent have gone up by 150 per cent, while those in the bottom 90 per cent have seen their incomes grow by just eight per cent.

Adding to that disparity is that "it's becoming easier for individuals to respond to higher tax rates with behaviour that lowers the income subject to such high rates of tax." So, he's calling for an overhaul and a dual-income tax on the paycheque as well as on investments. That would create 'fairness', according to Milligan, by closing taxation-avoiding loopholes that are typically used by the very wealthy.

The report is also recommending higher tax rates on some employment income, by adding a couple of new brackets. Right now, the top bracket is 29 per cent for income over $136,000. Milligan is suggesting a bracket starting at $250,000 that's taxed at 32 per cent. And another bracket for incomes over $400,000 taxed at 35 per cent.

The calls for action have amplified in recent months. This week, a TD report said "a number of trends suggest that income inequality may rise higher, and social mobility could decline, in the years ahead"

Policymakers are likely going to have to lean more against income inequality. And days ago, prominent American economist Robert Reich warned Canada is "moving towards exactly the same degree of income and wealth inequality" as the U.S.

Amanda Lang discussed the issue with law professor Vern Krishna at the University of Ottawa on Thursday's episode of The Exchange.


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