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Economy Lab Roundup: Why has the One Per Cent’s tax share shrunk?

The 164-foot Destination Fox Harb'r Too off the Nova Scotia coast.

REUTERS

A funny thing happened on the way to a post-recession recovery, and the resulting shrinking of government deficits. It seems the wealthiest Canadians have been paying a smaller proportion of the country's taxes.

Statistics Canada's release last week on the country's highest-income tax filers revealed that since the recession hit, the highest 1 per cent of earners have seen their share of federal and provincial income taxes paid shrink year by year – from 23.3 per cent in 2007, before the recession, to 20.8 per cent in 2011, the most recent year for which Statscan has detailed tax-filing data. And while the median amount of taxes paid by the top 1 per cent resumed rising after bottoming in the depths of the recession, by 2001 is was still 3 per cent below the 2007 median. This despite the fact that median incomes for the top 1 per cent in 2011 were up 1 per cent from 2007.

A Statscan analyst told The Globe and Mail that the recession itself may have provided the country's highest earners something of a tax break. High-earners typically get a significant portion of their income from investments (on average, the top 1 per cent get less than two-thirds of their income from employment wages and salaries) – and those investments took a beating in the 2008-09 financial crisis. Because some of the losses could be carried forward, the analysts theorized, they could be used to reduce the tax hit in subsequent years.

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Nevertheless, the numbers suggest Canada's richest earners have been carrying less of the weight in the recovery than they had before the recession. Still, it's worth noting that they also provide an outsized share of tax revenue: In 2011 the top 1 per cent accounted for 10.6 per cent of the nation's income, yet paid 20.8 per cent of its tax dollars.

Housing overvaluation? Check your measuring stick

Deutsche Bank this week awarded Canada with a dubious distinction: The most overvalued housing market in the world. Home prices, relative to rental costs, are 88 per cent above their historical norm, it said; prices relative to income are 32 per cent above the norm. Combine them, and you get an average 60-per-cent overvaluation. Ouch.

But the German banking giant may have grabbed Canadian headlines by using the wrong yardsticks, according to a Toronto-Dominion Bank economist.

The editorial board of Business in Canada, a business and economic news website, asked TD economist Diana Petramala what she thought of the Deutsche Bank analysis – and the short answer is, not much. Ms. Petramala took issue with Deutsche Bank's use of the price-to-rent ratio, noting that because rent increases in some parts of the country are legally controlled, rents can become artificially low. She said that while the price-to-income ratio is a better measure, the German bank undercounted total income. A broader income measure, including investment income and government transfers, "suggests the overvaluation is closer to just 8 per cent," she said.

Canada's companies: Also-rans in the R&D race

If a picture is worth 1,000 words, then this chart will save me a lot of wordy ranting about Canada's lacklustre performance in research and development. It's a graphic of the world's top-50 companies for R&D spending. It's from the 2013 European Union Industrial R&D Investment Scoreboard – and there's not a single Canadian company on that list. Indeed, the EU study's list of the top 2,000 companies globally in R&D spending reveals that you have to go all the way down to number 83 (Bombardier Inc.) before you find a Canadian firm. Next is BlackBerry Ltd. (formerly Research In Motion) at number 97; there are no other Canadian companies in the top 200. It certainly raises questions about the effectiveness of the Canadian government's reliance on corporate R&D tax credits as its preferred method for delivering tax dollars to research and development.

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The airline seat squeeze

In the economics of air travel, airlines and aircraft makers have a pretty obvious trade-off: Squeezing as many passengers as they can onto each plane, versus providing more comfort in the interest of keeping customers coming back, or even charging them a little more. As many of us prepare to board airliners for holiday travel, it's timely to point out that this air travel equation has become more complicated – by the expanding size of the human buttocks.

The Freakonomics website recently cited a Reuters report on a disagreement between Airbus and Boeing on the appropriate standard width of an economy-class passenger seat. Airbus is calling for an industry-wide minimum of 18 inches, while Boeing prefers its long-standing 17 inches. The narrower width allows Boeing to fit 10 seats in each row of its 777X jet, while Airbus's competing A350 goes with nine seats to a row. Airbus has produced studies that show that on long-haul flights, the extra inch improves sleep quality by 53 per cent.

The 17-inch standard hasn't changed for decades – but the typical passenger has gotten bigger. The report, citing U.S. Department of Health data, said the average weight of a 40-to-49-year-old American male increased by 10 per cent from the early 1970s to the early 2000s. The average American adult male's diameter at the hips is now about 12.6 inches, apparently – leaving little in-flight room for Elvis impersonations either way.

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More

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