what’s so bad about more inequality?
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What’s so bad about more inequality?. Lars Osberg Economics Department Dalhousie University ACADEMY OF THE SOCIAL SCIENCES IN AUSTRALIA – 2013 ANNUAL SYMPOSIUM Canberra , Australia November 12, 2013. “More Inequality” . - PowerPoint PPT PresentationTRANSCRIPT
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WHAT’S SO BAD ABOUT MORE INEQUALITY?
Lars OsbergEconomics DepartmentDalhousie University
ACADEMY OF THE SOCIAL SCIENCES IN AUSTRALIA – 2013 ANNUAL SYMPOSIUM Canberra, Australia November 12, 2013
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“More Inequality” • Cross-national level comparisons @ point in time (e.g. U.S.t > Aus.t)
• Menu of choices? Causes ∆ health, happiness, crime, social mobility ?• Stability assumed – steady state Equal Growth rate @ all percentiles
• Over-time for same society – e.g. US2013 > US1983
• U.S., Australia, Canada – 30 years of Unbalanced Growth• Increasing Inequality Differential in growth rates: Top 1% >> Bottom 99%• Why expect big slowing of top 1% growth OR big acceleration of 99% growth?
• Continued differential in income growth rates plausible – compounds to ever larger gaps
• Income = Consume + Save: Implications of continued growth differentials?• Save: ↑ Financial Assets => ↑ Financial Liabilities =>↑ Debt Fragility=> Real Crises• Spend: => ↑ Extravagance; ↑ Advertising Luxuries; ↑ political & social advantages
• Increasing Inequality cannot be a steady state• Interacting Instabilities of Imbalances – but what next?
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“More Inequality” – U.S.t > Canadat
Cross – national comparisons of levels• Reliable cross-national data on inequality only since 1970s
• Now a large literature on income measurement, equivalence scales, etc.
Socially important “Possibility Proof”
• Market Economies have widely varying levels of income inequality while competing successfully in global markets.
• i.e. There Are Alternatives – different choices in different places
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A menu of choices?
Icelan
d
Sloven
ia
Norway
Denmark
Czech
Rep
ublic
Finlan
d
Slovak
Rep
ublic
Belgium
Austria
Sweden
Luxe
mbourg
German
y
Netherl
ands
France
Poland
Korea
Estonia Ita
ly
Canad
a
Austra
lia
Greece
Spain
United
King
dom
Portug
alIsr
ael
United
Stat
es
Mexico
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
Income Inequality in OECD - 2010Gini Index of Equivalent Disposable Income
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What would more equality imply ?• More Equality causes more
• health• life expectancy• trust• social mobility• educational performance AND LESS• infant mortality• Violence• obesity• mental illness• teen births• homicides• Imprisonment
• Wilkinson & Pickett: The Spirit Level: Why Equality is Better for Everyone (+ many articles)
• Method: Cross-national correlations & scatterplots, primate & workplace studies
• H0: ↑inequality =>↑ stress of social interaction
• Is Inequality Guilty of all this?• Can Inequality be proved Guilty?
• Onus of proof ?• 95% Prob (harmless) OR 95% Prob (Harmful)
• Level of certainty ?• “Balance of Probabilities” or “Beyond Any Doubt”
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“too many theories for the number of available data points” - Leigh et al (2009:399)
• Multiple Plausible Indicators of Complex Concepts• e.g. “Health” & “Inequality”; => ambiguity of estimates
• Causation – very hard to prove: formal econometrics not feasible• Outliers – weird or very informative ?• Onus of proof – required proof: “harmful” or “harmless” ?
• Most Convincing evidence:• Intergenerational Social Mobility & Inequality of Opportunity
• Also – more inequality => more unhappiness & social conflict
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Robust association – inequality of outcome & inequality of opportunityBrunori, Ferreira, Peragrine (2013:27)
Variety of Social Mobility Measures
Intergenerational - Correlation Education - Earnings elasticity - Decile transitions
- All are lower where inequality of income is greater
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Equality of Opportunity?
• Parents choose Human Capital Investment for own Children subject to Income Constraint
• Becker/Tomes: parental altruism model • Max U0 = u0(C0,u1(C1, U2))
• s.t. Yi = Ci + HKBi + Ki • Yi = Wi + rhi HKBi-1+ rk Ki-1.
Market Society Implies:• Inequality of Outcome in one generation begets Inequality
of Opportunity in next generation
• Pure Market Economy is Dynastic Society • (subject to random variation in rhi and rk)
Not a new insight – Marshall & many others
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Assumed: No scarcity of top slots• Human Capital Model assumes no rationing of access to top slots
• Harvard admits all applicants who can pay; All hard-working MBAs become CEO
• Strong Assumption: There is nothing competitive about life.• success by others does not affect probability (success by self)
• BUT in a competitive race, only top few can win• Scarcity of top slots => own prob (success) decreases when others prob (success) increases• Intergenerational mobility in social rank: trading ranks - when some go up, others must go down
• Implications of Rationing of Access + Increased Payoff to top slots?• “rat-race” model → greater over-investment in effort to increase own Prob (promotion)
• Increasing stakes in early school success imply more pressurized childhood ?• Real “Equality of Opportunity” has greater costs to affluent parents
• Greater “drop from top” implies less support by affluent for public spending to equalize opportunity (which would decrease chances of own kids’ success)
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Cross-National Comparisons – Stability of Inequality level is assumed
• Steady State Inequality Equal Growth rate @ all percentiles• Happy Accident of 1953 -1980• Not our current problem
• “More Inequality” - U.S. & Canada & Australia• Increasing Inequality over time Unbalanced Growth by Income class
• Increasing inequality cannot be a steady state• Unbalanced Growth => Interacting Instabilities of Imbalances
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No stable level of Gini Index
Canada- Rising – esp. since 1990s- 2000+
- ↓ middle offset ↑ top- Top-coding survey data
USA Rising since early 1980s
Australia Trending up 1995 2000 2004 2008 2010
0.25
0.27
0.29
0.31
0.33
0.35
0.37
0.39
Australia, Canada, USA & OECDGini Index of Post-Tax/Transfer Equivalent
Household Income
Australia CanadaUnited States ALL OECD
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Alvaredo, Atkinson, Piketty, Saez (2013)
“most of the action has been at the very top”
U.S. & Canada – lower percentiles show little change in real income 1980 -2012
Australia: resource boom => ↑ earnings => change in bottom 99%
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Income Share = Ratio
• Income Share of Top 1% = Incomes of Top 1% Incomes of 99% + Incomes top 1%
• So where has the action been in Income Shares? • Numerator (Real Incomes of top 1%) ?• Denominator (Real Incomes of Bottom 99%) ?
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Increasingly higher long-run growth rates at top
U.S.& Canada – little growth in bottom deciles
Australia – significant earnings growth for 90%
Top /Bottom DifferentialIn income growth rates was similar
Focus on Top 1% - approximation to ↑ growth rate
Bottom
90% av
erage
inco
me
Top 10
-5% av
erage
inco
me
Top 5-
1% av
erage
inco
me
Top 1-
0.5%
avera
ge in
come
Top 0.
5-0.1%
avera
ge in
come
Top 0.
1-0.01
% avera
ge in
come-0.50%
0.00%0.50%1.00%1.50%2.00%2.50%3.00%3.50%4.00%4.50%
Average Real Income Compound Annual Growth Rate: 1982-2010
AUSTRALIA, CANADA, USA
USA CANADA AUSTRALIA
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Top 1% Income - No Natural Upper Bound
Real Average Income Top 1% - Cyclical Fluctuations - Upward trend -slow 1935-1980 - accelerates 1985+
CCPC income not included in Canadian data
1913
1918
1923
1928
1933
1938
1943
1948
1953
1958
1963
1968
1973
1978
1983
1988
1993
1998
2003
2008
0
200000
400000
600000
800000
1000000
1200000
TOP 1% AVERAGE REAL INCOME Australia, Canada & USA
USA CANADA AUSTRALIA
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U.S.Balanced Growth = atypical episode
- 1965-1980 - equal growth rates for
top 1% & bottom 99%
- - 1940 – 1964- higher growth rates at
bottom – especially 1940s
- - 1980 +- Much higher growth
rates for top 1% -0.06
-0.04
-0.02
0
0.02
0.04
0.06
0.08
0.1
0.12
REAL INCOME GROWTH RATES: USATOP 1%, BOTTOM 99% & 90%
10 YEAR COMPOUND ANNUAL RATE
TOP 1% BOTTOM 99% BOTTOM 90%
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Canada:Longer balanced growth period Mid 1950s-mid 1980s: - bottom 90% growth rate
slightly higher than top 1% (but roughly balanced)
Pre-1950s & post 1985:- Significant differences in
income growth rates
- Pre-1950 – compression- Post 1986 – top-end
growth much faster
1920
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
-0.04
-0.02
-6.93889390390723E-18
0.02
0.04
0.06
0.08
Figure 7REAL INCOME GROWTH RATES: CANADA
TOP 1%, BOTTOM 90%10 YEAR COMPOUND ANNUAL RATE
TOP 1% BOTTOM 90%
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“Once-only” & Income Growth 1940-1970• Recovery from Mass Unemployment of Depression + WWII controls• Structural Changes with Major Income Impacts
1. High % agriculture => rural out-migration => big wage gains2. Low % employed women => big impact of increase female jobs 3. Low % complete post-secondary => high marginal HK returns4. Capital deepening => increased MPL post WWII 5. “Baby Boom” => demographic bulge 6. Unionization; increased bargaining power until late 1950s
• Political economy of social policy ?• Credible ‘hard left’ political option => “threat effect” for elites
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AustraliaUnequal growth – normal eventNot same pattern as U.S. & Canada pre 1980s
35 years of compression 1951-1986
1986 + similar differential in growth rates
-0.08
-0.06
-0.04
-0.02
-1.38777878078145E-17
0.02
0.04
0.06
0.08
0.1
REAL INCOME GROWTH RATES: AUSTRALIA TOP 1%, BOTTOM 99% & 90%
10 YEAR COMPOUND ANNUAL RATE
TOP 1% BOTTOM 99% BOTTOM 90%
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Suppose Past U.S. Trends Continue ?
Median Top 1% Dollar AnnualTop 1%/Median
Household Average Gap $ increase Ratio
1984
47,181 376,135
328,954
10,341 8.0
2011
51,100 878,960
827,860
26,025 17.2
2031
54,207
1,632,378
1,578,172
49,613 30.1
2038
55,338
2,027,304
1,971,966
61,992 36.6
Growth Rate 0.30% 3.14%
1984-2011
- 1984-2011: Annual growth rate differential ~ 2.84%
- No Big Deal if 2-3 years
- Compounds to very large $ differentials & ratios over 20+ years
- Too Large to Believe?
- Why would income growth rates change?
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Framing the question ? • Increasing Level of Income Inequality ? OR
• Differential in long term income growth rates ?• Top 1% income growth rate (3.14%) >> Bottom 99% growth rate (0.3%)
• Different words for same reality BUT• Differential Growth Rates perspective suggests:
• Why did growth rates differ ?• Why would growth rates equalize ?
• Substantial Slowing of Top 1% ?• Big Acceleration of 99% ?
• One-time level changes cannot explain long-term trend differentials• E.g. need series of tax cuts & continual ↑ labour supply
1984
1989
1994
1999
2004
2009
2014
2019
2024
2029
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
Top 1% to Median Income Ratio USA
actual2.84% differential3.36% differential
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Auto-equilibrating Market Mechanisms ?• Top 1% Income: Not a Capital / Labour Factor Shares story
• Large % income of top 1% = Labour compensation
• Why might top 1% growth slow?• Labour Market Story needed – could it be ↑ Supply (Effort) <= Tax cuts ?
• Could Top 1% run out of steam ? (i.e. @ max. possible effort) ?• “Effort” = (Hours per year)*(Work Intensity per hour)
• Max (Annual Hours) = 6,000 ?? (16*365=5,840) ; Intensity has some upper bound• BUT were the elite of 1982 really that slack ? [top 0.1% 1982 = 0.326 top 0.1%2011)]
+ timing does not fit + Labour/leisure choice is levels model & => backward-bending SSL
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H0: Segmented Labour Markets ?• “Globals and their peers”
• Top corporate teams share in monopolistically competitive profits• Rents to hierarchical rank increase with rank
• Profits = f (firm size <= scale of market) • Post 1980 – ↓trade barriers, ↑ firm growth rate <= global market growth; • Sets benchmarks for top positions in national firms & non-profit sector
• U.S. leads Anglo wage contours, with slow filter to other national top ends
• “Locals”• Long run growth rate hourly wage ≤ labour productivity growth
+ Share of Resource sector rents if unions or rapid development; - ∆ wage <= slack labour markets (if Ut > U*)
• Implication: Differential in Income growth rates persists
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What plausible alternative model implies likely:- substantial slowing of top 1% or- big acceleration of rest ?
• Could more education sufficiently accelerate the long-run growth rate of average 99% income?• U.S., Canada, Australia – already well educated
• Diminishing returns at successively smaller margin• Equalization within 99% does not imply acceleration of average 99%• Educational reform – inherently long lags to pay off• 25-64 Tertiary Education : 51% Canada > 42% U.S. > 38% Australia
• No evidence of convergent middle class incomes in Canada
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Stable Inequality Balanced Growth IFF Same Rate Income Increase @ all income percentiles
• BUT U.S.: Annual Income growth rate 1984-2011: • Top 1 % = 3.14% = r1 ; Median household = 0.3 % = rm
• Income Levels diverging @ r1 - rm = 2.8%
• Short-run chances for rm = 3%?• Unions weak; Low-wage competition strong; slack labour demand
• Why would Income Setting @ Top change & long run r1 ↓ ?• What are implications of continued Unbalanced Growth ?
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Income = Savings + Consumption• Income Increases @ top => Increase Savings => Increase Loanable Funds
• Macro Real Expenditure Balance requires: Increased Savings top 1% = increased spending rest
• Save => purchase of financial asset• Financial Assets = Financial Liabilities
• Financial Instrument: Asset for Holder = Liability for Issuer
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Differential Flows accumulate to Stocks
DEBATE : ↑ inequality of consumption < ↑ inequality of income ? If true: mitigates short run utility implications of greater inequality
• IGNORED: If true: implies changing distribution of assets and liabilities
• ↑ Net Savings @ top imply Accumulating Debts @ bottom• Savings & debts grow @ r1 but median income grows @ rm => ↑ leverage
• Financial Fragility => Financial Crises => Real Recessions (Kumhof & Ranciere)
• Recessions => Counter-cyclical stimulus => ↑ Public Debt / GDP => unpleasant choices for continued monetization or austerity / contraction
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Debt StabilityDt = (1 + rt)* Dt-1 - PBt
Dt = Debt in period trt = average rate of interest in period tPBt = Primary Balance in period t
= (Receiptst – Expenditurest)
∆ (D/Y)t = (rt - gt)*(Dt-1/Yt ) - (PBt / Yt) Yt = GDP for nation; Household Income for familiesgt = growth rate∆ (D/Y)t = change in Debt/Income ratioWill rt < gt forever?
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Debt Instability – not just a Public Sector Problem !
∆ (D/Y)t = (rt - gt)*(Dt-1/Yt ) - (PBt / Yt)
• Debt overhang compounds if / when: rt > gt
• Accumulated Deficits => ↑ Debt/GDP => Deficit => ↑ Debt => etc.• Can & Aus: low rt to maintain demand enables ↑ household leverage
• Unpalatable Choices:• Anti-Inflation Monetary Policy increases (rt - gt) at both ends• Can rt < gt for long-term ? How to unwind rising household leverage?
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Instability <= Increasing Consumption?• Macro: Extravagant Elite Consumption does recycle Income
• “Downton Abbey” – high & stable inequality • Norms of consumption & deference built up over many decades
• In time, habituation → ”natural order of things” for both servants & served
• Increasing Income gaps imply Increasingly Extravagant Elite Consumption required for Macro balance• norms of luxury → increasingly distant from median• Veblen: “conspicuous consumption” = the main point of great wealth
• “if you’ve got it, flaunt it” lifestyles are resented by some• Gaps Increasing over time @ r1 - rm
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The Increasing Advertising of Envy• Increasing top 1% share = Increasing market for luxury goods
• Increasing % of advertising for luxury / status goods
• Status goods – a pointless purchase if nobody else thinks it’s “special / desirable / exclusive”
• => Advertising must increasingly emphasize exclusivity / luxury / privilege• Increasingly remind 99% of what only 1% can afford (& 99.9 of 0.1% )
• Increasing Inequality increases Market Incentives to manufacture envy.
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Externalities of top 1% spending ?• Increasingly distant top incomes imply:
• Increasing market for infrastructure of exclusivity• Separate world of resorts, gated communities, restaurants, etc.
• Increasingly difficult to socialize across income classes
• Escalating Consumption Norms? – set @ top & ripple down ? (Frank)
• => Increased middle class debts & increased financial fragility
• BUT: Why not just ignore (& tax) the top 1% ?
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Externality 1 – political influence• Top 1% refuse to be ignored politically
• U.S. evidence:• political & social preferences of top 1% quite different from 99%• Top 1% much more active politically than the 99%• campaign funding depends heavily on major donors • legislation heavily influenced by the policy priorities of top 1%
• Political influence: More for 1% implies less for 99%
• “Deeper Pockets” & Meaningful Democracy ?
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Externality 2: Advantages for kids• Increasingly affluent families buy increasingly more advantages for their
children
• “Income effect” of rising real incomes (Normal good) PLUS
• “Price effect” – Increasing “drop from top” implies ever greater incentives to prevent downward social mobility for own children• Top 1% / Median ratio increasing over time => ↑ cost of move from top to median
• When top 1% avoid downward mobility of their own kids, decreases the chances of upward mobility for 99%
• Maintaining belief in “equality of opportunity” becomes ever harder
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If markets will not auto-equilibrate, can political economy stabilize ?USA: What chance for a New “New Deal” ?
• 1930s: FDR & “New Deal”• U.S. Policy Innovation Stabilized Growth & Inequality
• Cyclical Stimulus + Structural Reforms + Progressive Taxation + Social Security • Restraint top end income growth + fiscal recycling + financial market
regulation + unions => ↓ inequality + period of balanced growth
• “Tax & Spend” can in principle stabilize the distribution of post-fisc income for any given trend in market income. – but how likely is that?
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The unsustainable does not last – but what follows?
• Unbalanced Income Growth Ever Increasing Inequality • Cannot be a steady state equilibrium
• Produces Interacting Instabilities – with cumulative impacts
• Parallels with 1930s but many structural changes since
• No Automatic Economic self-correction Tendency is apparent• Political Economy of Adaptation to Systemic Instability:
• Europe in 1930s: both disastrous choices and enduring successes• Political choices matter
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Differences in Rates of Growth Drive Changing Income Shares1940-1973 – strong growth in bottom 99% incomes + slow growth for top 1% = declining share for top 1%
1980-2012 – income stagnancy for bottom 99% + strong growth for top 1% = rising income share for top 1%
T. Piketty and E. Saez “Income and Wage Inequality in the United Staes, 1913-2002,” Chapter 5 in The Oxford Handbook of Economic Inequality, edited by Wiemer Salverda, Brian Nolan, and Tim Smeeding, Oxford University Press, Oxford, 2009, page 174
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Canada – nil real growth for most
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
0
20000
40000
60000
80000
100000
120000
Total Income of Canadian Family Units:1976-2009
20th percentile 40th percentile median 60th percentile 80th percentile
2009
Dol
lars
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U.S. – real growth only at top
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USA: Conflicted attitudes + $ politics• Bimodal distribution → small
migration tips majority balance• BUT short terms + division
powers + courts => gridlock + soon tips back
• “Deeper Pockets” • Increased economic Inequality =>
Increased Inequality of Political Influence
-0.50
0
-0.37
5
-0.25
0
-0.12
50.0
000.1
250.2
500.3
750.5
000.6
250.7
500.8
751.0
001.1
251.2
501.3
751.5
001.6
251.7
501.8
752.0
000
0.2
0.4
0.6
0.8
1
1.2
1.4
Preferences for Leveling in the United States 1987-1999
U...
Rel
ativ
e fre
quen
cy
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1925
1928
1931
1934
1937
1940
1943
1946
1949
1952
1955
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
-0.080
-0.060
-0.040
-0.020
0.000
0.020
0.040
0.060
0.080REAL INCOME GROWTH RATES: FRANCE
TOP 1%, BOTTOM 90%10 YEAR COMPOUND ANNUAL RATE
TOP 1% BOTTOM 90%
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60
30
10
A party that promised to raisetaxes on the richA party that promised not toraise taxesDK/NR
BASE: Canadians; February 21-28, 2012 (n=3,699)
Q. In the next federal election, would you be more likely to support a party that promised to NOT raise taxes or a party that promised to raise taxes on the rich?