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We’re all getting richer due to income mobility

Appeared in the Winnipeg Free Press, Okanagan Sunday and Windsor Star
Authors:
Release Date: September 19, 2007

There has been a spate of news stories in recent months dealing with the suggestion that the gap between the rich and the poor in Canada is at a 30-year high. Liberal leader Stéphane Dion even promised to make the unfair distribution of income in Canada one of the major issues in the next federal election.

Claims like these make good headlines, but the cliché about the rich getting richer and the data supporting the claim are both highly misleading.

At issue is the failure of this train of thought to consider income mobility—the extent to which the poor remain poor and remain in the “poverty trap.” In other words, if 100 families were in the bottom income class in 1991, how many were still there in 1999?

A recently published study by Professor Charles Beach of Queen’s University used Canadian income tax data to track persons aged 20 to 64, who earned at least $1,000 a year and were not students getting post-secondary education. Persons were considered to have “very low income” if they earned less than 25 per cent of the population’s median income, a measure used widely by poverty activists.

Beach found that for every 100 males with “very low income” in 1991, by eight years later in 1999, only 17.5 were still in that condition. Twenty had moved on to “low income,” and over one half had earned “low or high middle incomes.” Nearly 14 per cent had “high or very high incomes.”

A U.S. study using data from the University of Michigan found similar results. Of 100 people in the bottom quintile in 1975, only five were still there in 1991. On the other hand, 59.2 per cent were in the top two quintiles. Over the same period, 37.5 per cent moved from the top to lower quintiles.

The explanation for this is simple. Income is low for the young who are new to the labour force; it rises with age and experience and falls again in retirement. Incomes also fluctuate as a result of temporary influences such as unemployment, illness, divorce, or inheritance.

The high mobility of Canadians between income classes and the explanation of the phenomenon have some important policy implications. Most Canadians agree that those with permanent or long-lasting disabilities who remain in low-income status should be taken care of by government. But as the data show, the number of these unfortunates is quite small and Canada has many public and private support programs for them.

The political rhetoric tends to focus on those whose low-income status is, in fact, only transitory. Policies designed to help them result in higher taxes for people at the peak of their lifetime earnings profiles. Furthermore, since the bottom 50 per cent of tax filers pays only about five per cent of all personal income taxes, this group cannot be helped much by income tax reductions. The elimination of sales taxes would help, but only to a very limited degree. To make the static income distribution more equal, massive cash transfers from the middle-aged to the young and old are required.

Is this a desirable policy? The young and old would almost certainly welcome higher incomes, but perhaps not once they realize that such a policy would mean even higher taxes at a time in their lives when they have high incomes but also face the expenses of raising a family. They might remember the maxim that there is no such thing as a free lunch.

Whatever individuals think about government policies designed to equalize incomes at every stage in life, it is certain that such policies reduce our freedoms and incentives to work, save, invest, and take risks.

Canadians should be weary of politicians who try to get their votes by using the cliché “The rich are getting richer and the poor are getting poorer.” The cliché is of questionable relevance and policies needed to equalize income inequalities over different stages of life come at great personal and economic costs.



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