For those with jobs, life is a drudgery – for those with capital, life is a comedy

The 99% protest at Occupy Toronto (photo CBC)

The Canadian and US tax systems reinforce the concentration of wealth in the hands of the 1%.

It will take a major shift in how the government structures the tax system to see any transfer in wealth from the 1% to the 99%. 

“Last year my federal tax bill — the income tax I paid,” said billionaire Warren Buffet in the New York Times “as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.”

People with jobs – low, middle or high income jobs – are taxed at source on the full amount of their incomes.  In effect the working person is a wage slave.

Slightly higher wages don’t impact wealth since the gains are taxed away. One commentator wryly noted in the early 90s, the only way to get ahead was to double your salary.

People with investments in shares, land and capital are taxed on capital gains. Through skillful tax planning they can often avoid taxation for decades and generations.

That’s how they become wealthy. They pass on their assets to their children through trusts or offshore accounts that never get taxed unlike your salary is taxed with every cheque.

It you only keep half of your salary and the wealthy keep 85% of their capital gains, it doesn’t take long for them to accumulate more and more capital further distancing them from the rest of us.

The system is rigged

“In Canada we have a progressive income tax” said Canadian Finance Minister Flaherty in The Globe and Mail “and it favors people with lower incomes who are vulnerable, quite frankly, in Canadian society. Our tax system is clearly progressive.”

Flaherty knew better and immediately added the caveat that something has skewed the system. “Having said that,” Flaherty added “I see a point that income distribution is important and that there is a concern that a very, very small group of people have very large incomes.”

Renters and landlords

A simple example of how capital gains create wealth is the landlord versus the tenant. If you are a tenant you are paying the landlord’s (the owner of capital) expenses including mortgage and taxes.

When you leave the premises you have nothing to show. The property owner after 20 years or so has a fully paid property that can be sold at a reduced tax rate, generally half. With skillful accounting, there may be no taxes to pay.

The landlord gets rich and the working person treads water.

Capital Gains

Owners of property and other capital have lobbied government’s to remove inheritance taxes which stopped the inter-generational transfer of wealth. Capital gains taxes were substituted but they also favour those with capital.

Over the decades the wealthy have befriended politicians and convinced them to lower capital taxes as a job creation strategy. They called that Reaganomics or the trickle down effect.  The simple fact that the wealthy got wealthier over the past thirty years disproves that theoretical benefit.

How to Beat the System

Canadians and Americans were told for decades by bankers and the government to see their houses as stores of wealth. The housing bubble proved that wealth creation through housing is an illusion.

During the 2008 housing crash and burn, tens of millions of people lost their investments and homes. Others saw their home equity plummet as market values dropped.

Did banks and financial institutions lose the same percentage of their net worth?

The answer is no. The governments bailed them out.

There are a few people who can develop skills that put them into the top 1% of incomes. Despite high taxes, they have a chance to invest some of their after tax earnings in capital. Rarely do they become part of the 1% who control 40% of the wealth.

Those fortunate enough to invest in the stock market saw their gains for the decade of the 00’s disappear.

The 1% club just kept getting wealthier in the meantime.