by Neil Reynolds
In this space last week, economist Brian Lee Crowley advanced his intriguing theory that demographic changes will compel Canada to return to the classic liberal principles of personal responsibility and limited government. A number of readers dissented. “Don’t be so greedy,” one of them wrote. “We have found in our character a generosity that has mandated, by the authority of democratically elected governments, the equitable distribution of wealth among most of our people.”
He suggested that people who find wisdom in Mr. Crowley’s newly published book, Fearful Symmetry: The Fall and Rise of Canada’s Founding Values, possess “hard little hearts.” These hard-hearted people, he said, think that economic losers should be made to suffer.
This reader raises interesting questions. Did generous governments really achieve the equitable redistribution of wealth? Many people believe that they did. Did progressive tax rates really shift income from the greedy rich to the impoverished masses? Many people believe that they did. These assumptions are central tenets in the statist orthodoxy of our times.
Although governments have indeed proven adept at moving money from one person to another, it is highly improbable that they significantly altered the distribution of wealth. As a number of economists have argued, this achievement was primarily accomplished by a global depression and two world wars.
From this sober perspective, governments didn’t so much redistribute the wealth of the rich as wipe it out. U.S. economist Emmanuel Saez, the University of California (Berkeley) professor who has exhaustively studied changes in economic inequality in the last century, notes that enormous wealth was obliterated in the First World War, in the Depression of 1920-22, in four years of the Great Depression (1930-33) and in the Second World War. From this quick succession of economic shocks, he notes, “capital incomes were severely hit … and were never able to recover.”
In partnership with McMaster University economist Michael R. Veall, Prof. Saez studied the distribution of Canadian incomes between 1920 and 2000 – and discovered a number of remarkable things. For one thing, for example, Canada has essentially the same distribution of wealth now that it had almost a century ago – before governments began to redistribute it.
Canada’s considerable welfare state expenditures notwithstanding, the highest-income people in the country now get roughly the same percentage of the nation’s income as stereotypical laissez-faire capitalists got before the First World War.
In 1920, people with incomes in the top 5 per cent got 33 per cent of all of the income earned in the country. In 2000, people with incomes in the top 5 per cent got 32 per cent.
In 1920, people with incomes in the top 1 per cent got 14 per cent of all the income earned in the country. In 2000, people with incomes in the top 1 per cent got 13 per cent.
In 1920, people with incomes in the top 0.1 per cent got 5.4 per cent of all the income earned in the country. In 2000, people with incomes in the top 0.1 per cent got 5.3 per cent.
Based on this analysis, you really can’t argue that governments have taken much from the rich and given to the poor. Between 1920 and 1929, high-income earners (the top 5 per cent) experienced sharply fluctuating shares of the nation’s income – but never fell below 32 per cent. In 1939, at the beginning of the Second World War, they earned 34 per cent of the nation’s income. In 1945, at the end, they earned 25 per cent – a rate that didn’t change very much until 1980 when the modern era of higher incomes began.
Midway between the captains of industry of the old days and the high-flying CEOs of the 21st century came – quite inadvertently – the greatest income equality in history, the product of the greatest destruction of wealth in history. Only in the last generation has wealth approached the fabled riches of the 19th century.
“The rentiers of the Gilded Age,” Prof. Saez observes in another of his incomes studies, “have been replaced by the working rich.” A rentier is a person who lives solely on the income generated by his capital – an apparently pleasant existence that George Bernard Shaw, the socialist, once highly recommended in one of his essays.
In their joint incomes study, Prof. Saez and Prof. Veall note that the return of the highest-paid people in the country to historic income shares “sets the stage” for a revival of the great personal fortunes of yesteryear – and the eventual restoration of capital to its accustomed place in society. It is worth noting that the greatest expansion of government followed the Second World War. Before the war, the number of Canadians required to file tax returns never exceeded 8 per cent of the adult population.
We could easily do this again. In Canada, the top 10 per cent of wage earners already pay 50 per cent of all federal income taxes. In the U.S., the top 1 per cent of wage earners already pay 40 per cent. (And the top 10 per cent of the top 1 per cent – in other words, the top 0.1 per cent – pay 20 per cent.) With only slightly greater accumulation of capital, we could stop taxing the poor altogether. The U.S. is almost there: The bottom 50 per cent of wage earners pay only 3.09 per cent of the country’s income taxes. Now that’s progressive.