The Liberal government has recently presented a federal budget aimed at promoting fairness across generations. They plan to reduce the costs of housing and education and hike the tax rate on capital gains exceeding $250,000.
This move addresses the long-neglected economic well-being of younger Canadians, but solely raising taxes on capital gains will barely dent the severe wealth inequality threatening Canada’s economic and cultural stability.
As Policy Options reports, housing costs have been rising faster than incomes, making it hard for many working families in Canada to find affordable homes. For Canada to reduce its widening prosperity gap, the government must look beyond old ideas.
They should explore policies previously considered radical or unorthodox but are now seen as viable solutions.
In the book Fiscal Choices: Canada after the Pandemic, the authors interviewed over 70 policymakers and experts on income and wealth inequality. They all voiced their concerns about growing disparities, though few had clear policy responses.
Many believe strong economic growth with low interest rates will solve these issues.
However, achieving such a balance doesn’t guarantee the end of inequalities.
Income inequality trends in Canada:
| Cohort | Median Disposable Income (Adjusted for Inflation) |
|---|---|
| Millennials and Gen Z | $44,093 |
| Gen-Xers | $33,276 |
| Boomers | $33,350 |
Despite efforts to improve income distribution, inequality in Canadian wealth and incomes has worsened. Programs like the child tax credit and $10-a-day child care have helped reduce child poverty and assist families in boosting household incomes.
Despite these programs and a progressive tax system, income inequality persists, especially in reducing the wealth share of the top earners.
People are starting to recognize that redistribution programs alone can’t fix the disadvantages of those without inherited wealth. This shift in attention to wealth inequality comes even as wealth distribution today is more balanced than it was a century ago.
Wealth is often measured by net worth, which includes financial and non-financial assets minus total liabilities.
The problem for younger generations is skyrocketing asset prices, especially housing, preventing new workers from earning enough to afford homes.
Though younger generations today have higher inflation-adjusted incomes than their parents at the same age, they still struggle with the wealth gap. They live in a time of labor shortages that push wages up. Nevertheless, this can’t compensate for the rising wealth disparity.
In 2014, Thomas Piketty’s book, Capital in the Twenty-first Century, argued that as long as returns on investments exceed economic growth rates, investments will outpace wage growth.
This imbalance contributes to the wealth gap, which exacerbates without adequate taxes on inherited wealth, stifling economic growth, reducing demand, and discouraging investment in human capital.
Gross inequalities pose a threat to liberal ideals of politically free and equal citizens solving shared problems. When asked about policy options, like a wealth tax or Universal Basic Income (UBI), policymakers expressed mixed feelings.
A wealth tax aims to reduce wealth inequality and focuses on redistributing wealth. UBI, instead, offers a baseline income to everyone, regardless of their financial situation or work status, promoting equal opportunity.
If the trend of capital returns outpacing wage growth continues, policymakers may need to consider both redistributive and predistributive strategies. Predistributive policies aim to ensure fair wealth distribution before disparity occurs.
Investing in public goods, notably education, can prevent severe inequalities from forming and support social mobility.
If Piketty and his followers are correct, increasing investment in human capital alone won’t suffice. As artificial intelligence may disrupt job opportunities, income security could need to detach from traditional employment.
Governments might need to develop a predistribution strategy reaching into property rights and capital endowments to avoid widespread economic distress.
Possible Policy Example:
Piketty proposes giving everyone a financial endowment at age 25. This grant, funded by inheritance and net wealth taxes, could amount to around $175,000, or 60% of an average adult’s net worth.
This “inheritance for all” system aims to level the wealth creation field and could help address the structural causes of economic inequality.
In the grand scheme, tackling wealth inequality will require innovative and perhaps unconventional approaches. Exploring such options may provide the necessary policy tools to ensure fairness across all generations and sustain the country’s economic stability.
