Canada’s Surprising One Percent

In the fall of 2011, the Occupy Movement staked its claims in cities across Canada. The occupiers declared “we are the 99 percent” and protested the rising share of income going to the top 1 percent.

The Occupy Movement was self-consciously leaderless and from the soggy yurts and drum circles was heard a jumble of incoherent complaints. Nonetheless, the protest resonated with many Canadians.

But our subsequent analyses and responses have been as jumbled and incoherent as the protests.

Just who are Canada’s 1 percent?

We immediately think of bank presidents and corporate CEOs with their multimillion dollar salaries and stock options. But this is not an accurate picture. The best source of data to examine the highest-income Canadians is the federal personal income tax. In 2010, the cut-off for the top 1 percent of income tax filers was an annual income of $201,400 per year. There were 254,700 people in the 1 percent, with a median income of $283,400.

The 1 percent problem emerged in the early 1980s. During the decades after the Second World War, the share of total income going to the top 1 percent fell steadily. Just after the war, it was 11 percent, falling to 7 percent in the early 1980s. Since then, the share has risen sharply and in 2010 was again 11 percent. And the rising pay is concentrated at the very top. The shares of income going to the 95–99 percent and to the 90–94 percent have been steady since the early 1980s.

Yes, there are the bank presidents and corporate CEOs. But they are a small minority—they are the 0.01 percent, the “plutocrats” of Chrystia Freeland’s Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else. So who are the others? There are many 1 percenters in the sectors providing services to business, such as accounting and consulting. There are many from the professions—law and medicine. The lawyers will most likely be mid to late career, in large firms. Most judges are in the 1 percent. The doctors will be specialists rather than family practitioners. The 1 percenters are the senior administrators of our hospitals and our universities. They are also the senior civil service and the top people in many quasi-public agencies. And there will be the star anchors and commentators from the major television networks and newspapers. The leaders of big-city museums, opera and ballet companies and symphonies are also 1 percenters. In other words, the 1 percent are the leaders in each of their sectors: the elites of the business, professional, educational, health, government, media and cultural sectors.

The main source of income of the 1 percent is just like the main source of income of average Canadians: their jobs. The 1 percent work for established organizations or are professionals. They are not entrepreneurs.

We are paying those at the top much more compared to what we pay the average worker. The pay of the CEO was 85 times the average worker’s pay in the mid 1990s; now the CEO gets 220 times more. This pattern has been repeated across all sectors, although less dramatically. The hospital CEO was always paid much more than the nurse, but now the gap is much wider and growing. The downtown corporate lawyer was paid much more than the general lawyer in solo practice, but the gap is widening; likewise, the gap between the university president and the lecturer, and the gap between the star columnist and the reporter, between the art gallery CEO and the curator.

Since the Occupy Movement started, the talk about the 1 percent problem has broadened to become talk about income inequality generally. It is said that Canada has a severe and growing problem of income inequality—the rich get richer, while the poor get poorer, and the middle class struggles to stay even. Again, the picture is not accurate.

Have the poor been getting much worse off since the early 1980s? This is what some writers about income inequality have been telling us. Certainly market incomes have become more unequal. Of course, in Canada, we have a progressive income tax system and government transfers to mitigate the market trends, especially the transfers targeted to assist those with lower incomes such as Old Age Security and its Guaranteed Income Supplement and the Canada Child Tax Benefit and its National Child Benefit Supplement.

Poverty rates, measured using the after-tax low-income cutoff (LICO) of Statistics Canada, have gone down since the early 1980s. Using the after-tax (plus transfers) rate, 9 percent of Canadians were below the poverty line in 2010, compared with 14 percent in 1983. Many readers will be puzzled by this claim. Surely, poverty has been going up. But it has not. We do see extreme poverty in rising food bank use and homelessness. But poverty overall has declined.

Many commentators on income inequality wilfully ignore this poverty indicator, an indicator we have traditionally used in thinking about inequality. Certainly we can do better. And our poverty rates are higher than many European countries. But the steady reduction in after-tax poverty is clear and is one of Canada’s great accomplishments of the last 30 years.

And the reduction in poverty has been most dramatic for those who were most vulnerable. For example, the after-tax poverty rate for unattached elderly females was about 60 percent in 1980 and by 2010 had been cut in half to 30 percent. The poverty rate for female lone-parent families was 50 percent in the early 1980s and fell to 20 percent in 2010. Child poverty has also declined.

The writers about income inequality have been telling us that the real incomes of average people have stagnated while the incomes of the rich have soared. Again, this is not true. The most accurate measure of family income is after-tax income, adjusted for family size and composition. From the mid 1980s to the mid 1990s, the real family incomes of the bottom 20 percent, the middle 60 percent and the top 20 percent stagnated. Each quintile was only as well off in the mid 1990s as it was a decade before. But since then, the incomes of each quintile have grown. From 1995 to 2010, the average income of the bottom quintile rose 25 percent; the average income of the middle three quintiles rose 30 percent, and the average income of the top quintile rose 41 percent. The rising tide lifted all boats.

Yes, market earnings became more unequal and after-tax income inequality rose. But market inequality was mitigated significantly by the tax and transfer systems. After-tax income inequality, measured in the standard way (the Gini coefficient), has risen but not by very much. Inequality today is about what it was in the late 1960s.

Many writers, after the Occupy moment, began from the sharply rising share of the top 1 percent—and then used the (poorly substantiated) claim of sharply rising general inequality to call for the agenda they had all along: more government initiatives to reduce poverty and overall inequality. This is a perfectly fine and laudable agenda, but it is not what the 1 percent issue is all about.

The 1 percent—the leaders across a whole range of business, government and non-profit sectors—have been receiving rapidly rising salaries and a growing share of the pie. This is deeply troubling to many Canadians. But the concern is different from the concerns about poverty and income inequality that have been part of Canadian political culture over the post-war period. And we are having trouble articulating our concerns.

So what is the problem?

It is not, as some might think, an issue of tax fairness. Canada has a progressive income tax; the top 1 percent pays a higher average rate of tax than other groups. And the average rate of tax paid by the 1 percent has remained the same. Moreover, Canadians on the whole do not begrudge high incomes that come from exceptional individual accomplishment.

If we have trouble with the rising share going to the 1 percent, it is because we have trouble with the performance of the elites in all sectors. They are getting paid more but failing in their roles as leaders, and many Canadians feel their rising share is undeserved. Yet the 1 percent remains blithely confident of entitlement to and deservingness of such high salaries.

The senior financial community, business press and academic economists are especially undeserving. They provided the financial innovation, overleveraged and reckless investment, and sham theorizing that led to the 2008 financial crisis and the great recession that devastated the savings of many, hiked unemployment and left governments saddled with high debts for their citizens to pay off in the future. Yet they have accepted no responsibility—indeed, they seem unaware that they might bear any responsibility—and continue to be handsomely rewarded.

The rising salaries of the 1 percenters have not been caused by the forces of supply and demand. The number of highly skilled people seeking leadership positions in each sector has grown faster than the number of such positions. Rather, these salaries are caused by a cultural shift: since the early 1980s, there has been a change in the culture of leadership and the culture of compensation.

The shift has been toward casting leaders as the personification and sole guiding hand of the organization. They are heroic, in a literary sense: not necessarily of noble birth, but bold, adventurous, going forth to contest and slay evil forces, earning honour. These bold strategic heroes must be compensated handsomely. Yet in reality the accomplishments of most organizations owe rather little to their leaders. Furthermore, the opportunity for the leader’s accomplishment has been created not just by individual drive but also by others in the organization and by the collective—by the society in which the leader and the organization lives.

This cult of leadership and its concomitant new culture of compensation began in the business world but has spread across all sectors.

Most obviously, as compensation shifted to stock options, business leaders did extremely well. Of course, it is important to align the interests of management with the interests of shareholders. But the compensation shift went far beyond what is needed: every banker is “exceptional” and every banker gets a bonus, even though Canadian banking is a cozy cartel, well protected and regulated, and the main job of the leader is to mind the store and not do anything reckless. And of course the stories of corporate CEOs getting huge compensation despite their firms doing poorly are many—and true.

Today the leaders across our hospitals, universities and cultural organizations carry out visioning exercises and prepare strategic plans, and are rewarded with bonuses for deliverables. “Pay for performance” are the buzz words. These are “transformative” leaders who need to be paid more. Yes, we need leaders and leaders are exceptionally important. But much of this strategizing and pay-for-performance is cant. Strangely, in today’s overblown environment, every leader is well above the average leader and gets a performance bonus. And if after several years of their bold interventions, we compared their institution against others in their sector, we would see they all look pretty much the same. We have overattributed the success of an organization to the leaders, and handsomely compensated them, regardless of outcome.

But the unease goes deeper. The 1 percent protest points to a deeper malaise.

The 1 percent are highly accomplished and work incredibly hard; its members have achieved their leadership through a relatively open, competitive and meritocratic process. Unfortunately, this very meritocratic process allows many to feel absolved of the responsibilities to the general welfare that leadership entails.

Deploying her historically rooted common sense, Jane Jacobs in her last book, Dark Age Ahead, warned that we might be approaching our culture’s dead end. She argued there are five pillars of our culture that we depend on, including higher education and the self-policing of the learned professions. These pillars are showing signs of decay. Universities drift away from educating toward credentialling. Legal and accounting fraud increases; neither profession can be trusted any longer to “maintain stability, honesty, and good order for the common welfare.”

Tony Judt, the distinguished historian of post-war Europe, begins his book Ill Fares the Land: “Something is profoundly wrong with the way we live today. For thirty years we have made a virtue out of the pursuit of material self-interest: indeed, this very pursuit now constitutes whatever remains of our sense of collective purpose.” Many Canadians agree. We no longer ask if a public policy is good or just. We ask only if it will improve economic competitiveness and stimulate investment. We cannot, for example, come to grips with how our consumption is depleting the environment and altering our climate. We all must struggle with these questions, but the leadership of any society bears a special burden of recognizing our collective problems and articulating our common purpose.

This lack of genuine leadership is straining our democracy, although not in the way of many countries where donations from the 1 percent to electoral financing have grossly perverted the ideal of political equality. In Canada, campaign contributions funded by the top earners have not overwhelmed democracy. Indeed, the 1 percent problem in Canadian democracy is a paradox. Despite one person one vote, we know leadership elites will play a role in our democracy. But we also know the elites of business and government will tend to dominate and so we expect certain other elites will offer countervailing sources of authority and power. But these other elites among the 1 percenters are no longer countervailing; they have joined business and government. Chris Hedges, in Death of the Liberal Class, with characteristic rhetorical fire, writes: “For decades, the liberal class was a defense against the worst excesses of power. But the pillars of the liberal class—the press, universities, labor movement, culture, and liberal religious institutions—have collapsed as effective counterweights to the corporate state. In their absence the needs of the poor, the working class, and even the middle class, no longer have a champion.”

To use C. Wright Mills’s term, the 1 percent are the power elite. Mills wrote about the political, economic and military circles in the United States in the 1950s. In Canada today, the 1 percent come from more circles but the idea is the same: the power elite is “an intricate set of overlapping small but dominant cliques [that] share decisions having at least national consequences. In so far as national events are decided, the power elite are those who decide them.”

There is a deep malaise, voiced only in an incoherent jumble, that the elites are failing us, as they drift away and get paid more.