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Wealthy Middle Class Canadians and Other Media Fables

36cAfter a few years of telling us how badly off Canadian were, the media and others are now hard at work telling us how good we’ve got it. It pretty much confirms that the herd instinct is alive and well but thinking beyond the obvious isn’t.

The latest kick is to tell us how much progress the ‘middle class’ has made and if you do the same kind of shallow analysis that some media pundits have published lately, you’d draw the same conclusion.

To be clear: Stats Canada has reported significant increases in both disposable income and net worth in the middle class over the past decade. It is only the bottom of the food chain that has fallen backwards economically and by as much as 25%: this despite the perception that they are living high off the hog on the minimum wage and government (taxpayer) largesse. But, as anyone who works with data will tell you, the stats only tell part of the story and often not very accurately.

The first question that comes to mind is this. If we are all, except the poor, doing so much better, why are so many so upset about taxes? The second question is why are so many struggling to meet their financial obligations and why are bankruptcies rising?

To be sure, some of the reason is careless financial management by the individual and living beyond their means by others but it isn’t the whole story. There is a lot more to disposable income than simply subtracting the income tax deducted at source and thinking that what is left is a true indicator of just how well we’re doing.

I was talking about this with a friend and he disclosed his situation to me to illustrate how misleading the stats are and gave me permission to share the information on the provision that I didn’t identify him.

His gross income in 2013 was $ 191,453.69. This amount was made up of a base salary and a performance bonus both of which were taxed at source. He is paid biweekly and his net pay averages $3,350 every two weeks with a his bonus paid in a lump sum once a year.  This means that Stats Canada data would record his disposable income as $94,100/year which is a decent enough amount to live on quite comfortably.

Based on the media analysis, this is a guy doing very well indeed but we’re not quite done with our analysis yet.

The amounts deducted at source from his gross salary include: federal income tax, CPP, EI and mandatory contributions to his organization’s pension plan. It should be noted that the contributions to his pension plan while reducing his net income do increase his net worth.

Because he lives near me in Quebec, provincial taxes are not deducted at source and he pays the Quebec government separately over and above what is shown on his T-4.

He pays the Quebec government approximately $7,000/year and also pays $1,800 school taxes and approximately $3,500 in property taxes. That reduces his true disposable income to just under $82,000. Added to that are consumption taxes (GST, HST) which he estimates he pays on purchases that consume about 60% of his net income for a total of $7,389/year and an additional $4,000/year in various semi-hidden taxes and various user fees like provincial and federal gas taxes, eco taxes and other similar ‘revenue tools’ including various user fees for accessing of various levels of government.

He even had to pay his local municipality a $2.00 fee for the privilege of paying for something using his debit card. I won’t share the descriptive language he used to describe his feelings about that.images

All of this combined further reduces the money left in his pocket available to spend on himself and his family to a true disposable income of approximately $7o,000/year or roughly 39% of his original earnings. (Note: we’ve removed the pension plan contribution from the calculation because he does get to keep that less taxes when he  retires.)

It is that 39% he gets to live on and support his family and that the ‘tax the rich’ crowd are eyeing with the same intensity as a cat eyeing a mouse.

Beyond the data are other very real facts that don’t support the contention being put out by the scribes and others. The cost of living, for example, is another measure of just how well we’re doing and how well we’re able to provide for ourselves.

The average Canadian and American salary is fairly comparable and yet, the cost of living in Canada is significantly higher. Over the past few years when our currency was reasonably at par, Americans enjoyed significantly lower costs for everything from food to gasoline.

Where I live gas cost is hovering around the $1.34/litre range. It’s a little more in some areas and a little less in others. The equivalent cost for gas in the United States should therefore be approximately $5.00/gallon but it isn’t. It ranges from a low of just over $3.00/gallon in Texas, Oklahoma and the other southern states except Florida to a high of just under $4.00/gallon in California.

The cost of gas not only affects the direct cost of operating your vehicle but the cost of most consumer goods, including food. It is a cost that is driven as much by speculators and government taxes as it is by supply and demand.

The food price differential is anywhere from 30% to 50% in Americans’ favour.

The bottom line is that it is far tougher sledding in Canada than the Stats Canada disposable income stats suggest. The cost of many key staples have risen dramatically over the past decade. Gas prices have risen by 69% over the past decade, far outstripping the Bank of Canada’s inflation rate of 20% for the same period. The cost of housing has increased by more than 25%, food by more than 31% and energy costs (hydro etc.) by 47%.

All of this at a time when gross incomes have fallen pretty much into line with the Bank of Canada’s inflation figures which were mitigated by lower than inflation price increases for things like home renovation products, clothing and pet food. The overall impact, however, is that true disposable income is significantly reduced in that a dollar today does not buy as much as it did just seven years ago.

When a person who has achieved a fair degree of success in their chosen field ends up being allowed to keep only 39% of their gross income for themselves and is then confronted with a higher cost of living, it begs the question. How is the average person better off? If a person earning almost $200,000 has so little of their earnings left for themselves, how severe is the effect on a family earning half of that figure?

All the selective stats from Stats Canada will not change this one inalienable fact. Government at all levels, banks, business and others take too much of what we earn and that, my friends, is the true state of affairs with the middle class and the real reason why the middle class is in much poorer shape than some pundits and politicians would like you to believe.

We used to work to support ourselves. Today we work to support a system out of control and regardless of what some well-informed media pundits would like you to believe; we aren’t really wealthier as a result. We merely look good on paper.

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© 2013 Maggie’s Bear

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  • peggyt

    The stats are for all of Canada and Alberta raises the numbers. Now Ontario has a whole different set of problems. The liberal government will take every nickel out of your pocket and then waste it.

    • MaggiesBear

      They won’t take a nickle out of my pocket, I live in Quebec where the government owns your pocket. As bad as taxes are in Ontario, they are horrendous here. We even have a ‘Welcome tax’ which is an additional tax added to the purchase of a new home over an above land transfer fees and applicable provincial sales taxes and the GST. Government is out of control and it doesn’t much matter in what part of the country you live. It is an attitude that treats citizens as nothing more than taxpayers and we enable that by reducing ourselves down to nothing more than taxpayers.

  • StarJen

    When people talk about taxing the rich, I think they generally mean taxing individuals with incomes in the millions, taxing financial transactions, or imposing higher corporate tax rates on the largest companies.

    imf recently published a report that finds that lower inequality is strongly correlated with stronger, faster, and more long term growth, and at the same time, redistribution is benign in terms of growth… http://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf

    • MaggiesBear

      When people talk about taxing the rich, generally they mean the top 10% and in this country, that’s anyone earning more than $195,000. The rich pay their fair share and receive less in government benefit for every tax dollar they pay. The issue isn’t one class against an other, it’s government taking too much out of the economy.

      • StarJen

        If they mean that, then they’re silly. The top 10%, excluding the top 1% are not the much better off then the top 40%.

        The most extreme inequality is in the top centile and up, relative to the the rest, not the top 10%. You’re right, it’s not great policy to tax the top 10%, but it’s certainly good policy to look at taxation of extreme wealth. At least according to the imf.

        If you think there is an issue with government taking too much out of the economy, how do you explain the (very robust) correlation between higher growth and lower inequality, and between higher growth and higher redistribution?

        • MaggiesBear

          That economic formula has been tried repeatedly and failed repeatedly. Government is not better suited to decide what we should do with our money. They are elected to manage our common resources not to socially engineer our societies. The simple reality is that people are in far worse shape than the Stats Canada data indicates. The American economy is teetering again and our dollar has dropped significantly which is fine for exports but a killer for imports and we import a considerable amount of our food. My post is not about defending the top 10% it is about fair taxation for all and right now what we have is a convoluted system that is harming our economies. You don’t have to look very far to see the effect of that. Despite your claims to the contrary, Ontario is a classic example of what happens when citizens are over taxed. The Ontario economy has seriously declined and that is the result of nothing but over taxation and government meddling.

          • StarJen

            I think we more or less agree on most points, but…

            “That economic formula has been tried repeatedly and failed repeatedly.” — this is not what the imf report indicates, it actually indicates the opposite.

            “They are elected to manage our common resources not to socially engineer our societies” — Perhaps, but some social engineering is necessary. The criminal justice system and education are both obvious examples, but even with taxation, what about taxing excessive risk taking in the financial sector? Or with redistribution, public investments in infrastructure, health, education, and social insurance are pro-growth, pro-equality and beneficial forms of social engineering.

            “people are in far worse shape than the Stats Canada data indicates” — Yup, definitely. I remember reading that ‘median net worth it up 44%’ or so, but this is accounted for by the accompanying statistic ‘average home price is up 46%’. But real estate is overvalued! and the price of living is way up….

            I think we have a convoluted system as well…

            • MaggiesBear

              I think we do agree on more than we disagree over. But either way, it is always good to have a good discussion. :-)

            • Cytotoxic

              The stats Canada numbers were actually clear that the increase in overall wealth was not due to rising home prices. Nothing in this blog post really fisks it.

              The rich already pay far too much. They are the most exploited minority.

              • MaggiesBear

                That’s because this post was not about increases in net wealth but about disposable income.

              • StarJen

                http://www.statcan.gc.ca/daily-quotidien/140225/dq140225b-eng.htm?HPA

                The numbers actually show exactly what I said.

                Table 2, median net worth for ALL Canadians went from 168k to 243k, an increase of 75k.

                In the same table, Principle residence median value went from 204k to 300k. an increase of 96k.

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