Income Distribution

This data is from the economic team at Bank of Montreal and is extracted from their weekly financial digest Focus. It shows the disparity between rich and poor. It shows that Canada is a society which manages to keep the disparity from the extremes of the US:

An analysis of Internal Revenue Service data on annual income inequality in the U.S. shows that, for the most recent data available (2007), the top 15,000 households—roughly 0.1% of the U.S. population—received just over 6% of income, the highest figure for any year since the data became available in 1913, reflecting the surge in income inequality. The top 1% of households received 23.5% of income (the second highest on record, after 1928), while the top 10% received nearly 50% of income (the highest on record).

Income inequality in Canada is not nearly as dramatic owing to a more progressive tax system and a broader social safety net accompanied by a much flatter pre-tax income distribution. CEOs in Canada are not paid the astronomical multiple of rank-and-file workers as in the U.S. The problem in the U.S. is exacerbated by the recession, as the underemployment rate there has risen to a shocking 16.8%, well above the level in Canada. Having said this, however, Canadian income distribution is nowhere near as flat as in some countries, such as Denmark and France. The top 1% of Canadian households received 11.2% (vs. 23.5% in the U.S.) of income and the top 5%
accounted for 24.1% (in 2004).

The top 15,000 households in the U.S. earned an average annual income of just over $35 million in 2007, with an after-tax average income of just under $23 million. What this tells us is that a small number of households have the ability to save about half of the actual dollars saved by the whole country. In other words, the mega-rich have the ability to dramatically skew the data. Including the top 1% of U.S. households, average annual income per household in 2007 was $1.4 million before tax (compared to C$684,000 in Canada in 2004). Their after-tax income averaged just over $900,000 per household. If their after-tax savings rate were 25%, we would come up with more than 100% of the personal savings of the entire U.S. population according to Bureau of Economic Analysis (BEA) data. If all of this makes sense, it implies that 99% of the U.S. population could still have a negative savings rate of about 1%-to-1.5%.

Why does this matter? The right wing tells us this is a wonderful result because it means those who work hard and are talented are richly rewarded. But those, like myself, who want to live in a "middle class" society and not in the extremes of wealth and poverty characteristic of a third world country, find extreme inequality distasteful. Is it really the case that one person is so talented that they deserve 10 million times as much "reward" as the poorest of the poor? Not in my world view. So I support government efforts to limit the rewards going to the rich while assisting those who are falling behind.

My only complaint is that the government is horribly inefficient at distinguishing those who are milking the system from those who are truly the deserving poor. And I find that a lot of the government assistance programs really are "bureaucrat assistance" programs, i.e. most of the money goes to the bureaucracy and precious little to the targeted poor. But these are problems that are fixable. The simplest way is to remove the bureaucrats and all the "special" programs and have a negative income tax system that automatically adjusts income.

The funny thing is that a right wing nut, Nixon, actually pushed for the negative income tax system in the US. He was a rabid anti-commie and a bomb-the-back-to-the-stone-age militarist, but he was somewhat liberal in his domestic policies. In this case he got it right. It is an income adjustment system that gets the bureaucrats fingers out of the pie.