BUSINESS

DESTROYING THE MIDDLE CLASS

PATRICIA CHISHOLM November 6 1989
BUSINESS

DESTROYING THE MIDDLE CLASS

PATRICIA CHISHOLM November 6 1989

DESTROYING THE MIDDLE CLASS

BUSINESS

SPECIAL REPORT

TAXES, INFLATION AND STAGNANT INCOMES ERODE THE LIVING STANDARDS OF MANY FAMILIES

The view from Roger Gale’s spacious cedar deck in Vancouver’s upscale Kitsilano neighborhood looks like a middle-class dream. The streets are lined with attractive twoand three-storey homes, and thickly forested mountains tower in the distance across English Bay. But inside the Gale home, even with a family income of $57,000, the vision of prosperity vanishes. The furnishings are plain, and the family of four is squeezed into the top half of the house, which they co-own with another couple. Despite the cost-cutting sacrifice, Gale, 45, and his wife, Annde Paxton, 36, save little money and use almost all their income just to meet everyday expenses. Said Gale: “I live with my family in half the square footage that I had growing up with my four-person family. I think we want more.” That cry for the fading of the middleclass lifestyle, a level of affluence that was relatively easy to achieve for Gale’s parents, is now heard across the country as more and more people struggle to stop the relentless erosion of their incomes.

Battle: Most are losing the battle. In fact, the incomes of middle-class families, generally defined as the more than half of households earning between $30,000 and $70,000 annually, have not kept ahead of inflation for 10 years.

Today, one out of seven Canadians—including almost one million children—live below the poverty line at a time when wealth creation generally is at an all-time high. Over the past five years, Canada has been the West’s secondfastest-growing economy, behind Japan. The gross national product, which is the value of all goods and services produced in the economy annually, has risen to $580 billion from $431 billion in 1984. But taxes have become the largest single expenditure for middle-income groups, and that could increase if Ottawa goes ahead with its plan to impose a nine-per-cent Goods and Services Tax in 1991. The Conference Board of Canada estimates that the sales tax will reduce Canadians’ real disposable in^ come by $7.3 billion annually. And provincial S finance ministers meeting in Montreal on Oct. Ï 16 said that the GST would force provincial governments to raise taxes or cut services. Declared Gale: “It is time for the middle class

to stand up and scream, ‘Tax the rich.’ Canadians from coast to coast told Maclean’s that they are being financially crushed between mounting taxes and inflation on the one hand and their allbut-stagnant incomes on the other. Many economic analysts say that their concerns are wellfounded. Declared David Ross, an independent social-policy consultant in Ottawa: “The middle class is getting smacked all over the place, and they know it.” Despite raises, promotions and working longer hours, the number of people earning $30,000 to $70,000 are finding themselves increasingly in debt as they struggle to accumulate the icons of middle-class life—a home, college educations for their children and a comfortable retirement.

Debt: Along with more debt, most middleincome families now rely on two wage earners to avoid falling even further behind—in many cases,wives are working simply to put food on the table, and not for luxuries. Adding to the pain, there has also been a dramatic collapse in the amount of money people are saving as

THE SHARPENING TAX BITE

In the 1960s, food, clothing and shelter together were a consumer’s largest cost.

Now, it is taxes, which eat up 50 per cent of the average Canadian’s income.

they spend to help maintain a middleclass lifestyle. Clearly, for thousands of Canadians, the struggle to make ends meet has become a frantic race on a treadmill, and there seems to be no way to move ahead.

Trends in the future point to a further strain on living standards. Taxes already take a larger bite than ever before and the painful levies seem to be on a relentless rise. In the early 1960s, food, shelter and clothing were a consumer’s biggest expense. Now, it is taxes from all sources, including provincial income and sales taxes and local property taxes. As a result, the middle class is thinning as Canadians are pushed out to either end of the income scale, a phenomenon that economists describe as “income polarization” (page 64). Said Charles Beach, professor of economics at Queen’s University in Kingston, Ont.: “The rich are getting richer, and the poor are getting poorer.”

Pace: The slow pace of wage increases is one cause of the problem, although stagnant incomes have also helped to keep inflation under control. According to Statistics Canada, the average family income, adjusted for inflation, was $42,879 in 1980. After a sharp drop during the recession of the early 1980s, it crept back up to just $43,604 in 1987. That marginal increase, said Richard Shillington, a leading Ottawa-based economic consultant and

tax expert, amounts to “treading water.”

At the same time, the number of middleincome jobs is declining. Most new jobs are created by the exploding service and hightechnology industries, but those jobs are usually at the low or high end of the wage spectrum. As a result, there are plenty of job opportunities for cashiers and advanced computer experts, but fewer and fewer for middle managers.

Bills: Even the normal expenses of running a household are becoming onerous for many, including those with incomes that might seem high to poorly paid Canadians. Anne Lamar, for one, a married 29-year-old senior copywriter for an advertising agency in St. John’s, Nfld., says that she is never sure there will be enough money to pay the bills. “We earn $60,000 and we can’t afford furniture,” she said. After taxes, the Lamars are left with about $40,000. Anne Lamar and her husband, Robert, 29, an auto mechanic, have two young children. They own a century-old, two-storey duplex in downtown St. John’s. But in most other ways, they say that they feel financially squeezed: they have not taken a vacation in three years and Anne Lamar said that even the occasional dinner out with a bottle of wine has become a rare treat.

Like the Gales, who have been unable to achieve the level of wealth their parents enjoyed, the Lamars also say that they are bewildered by their financial problems. “We are making the kind of money we always thought would let us relax,” said Anne Lamar. “But I’m not confident that I’m ever going to have

anything left over at the end of the month.” And yet their debts do not seem unusually high—a car loan, a student loan and a mortgage, totalling $960 a month. While they managed to put aside a college education fund for their children, they have nothing left for retirement savings.

Said Robert Lamar: “My paycheque is wild. They take one-third.”

Reform: Taxes have reduced middle-class incomes more than any other factor since Finance Minister Michael Wilson launched the first leg of the government’s tax-reform program in 1984 (page 66). Although some tax rates were marginally lowered, there were several other little-noticed changes, such as reducing indexing for inflation and making tax cred-

its mostly unavailable to middle-class Canadians. According to a forthcoming study by Carle ton University public administration professor Allan Maslove, the after-tax income of a household earning $40,000 is $970 less than it was in 1984, when the Tories were first elected. As well, the federal government taxes an individual with an income of $55,000 at the same 29-per-cent federal marginal tax rate as it does an individual making $130,000.

At the same time, taxes have eased for

groups on either side of the middle class. Households earning at least $115,000, one per cent of the total, now take home $1,570 more than they did in 1984, a 1.4-per-cent real increase. And those earning less than $10,000, or 20 per cent of the population, are also better off, by $220 a year, or 2.2 per cent. Shillington says that the tax reduction for high-income earners is designed to discourage them from fleeing to the United States, where marginal tax rates are generally lower. But he adds that

the result is a greater burden for those trapped in the middle. Declared Shillington: “People in the middle are beginning to realize that they are much worse off than they were five years ago.” Burden: The tax burden on the middle class will increase if the GST takes effect on Jan. 1,1991. Consumers will face a nine-per-cent tax on virtually all purchases, including all types of services from legal fees to haircuts. Under the GST, those households earning less than $24,800 would receive a full sales-tax credit, with the amount of the credit gradually declining as income climbs. Households that inelude two children and earn more than $40,000, including many in the middle class, will receive no sales-tax credit at all. Leona Decaire, an ac-

countant who lives in White Rock, B.C., with her accountant husband, Jack Narsted, and infant daughter, Gabrielle, says that the tax will sharply restrict her family’s lifestyle (page 60). Added Decaire: “The basics, like children’s clothing, should not be taxed. If we are going to have to tighten our belts, it would be nice if we could dress our children.”

Faced with growing popular concern and a rising political debate surrounding the GST, Wilson launched a publicity and speaking cam-

paign last month to win converts to his plan. In an interview with Maclean’s, Wilson maintained that the GST will not hurt the middle class. He said that the “income impact” of the sales tax will amount to only a one-per-cent increase for most consumers, because the removal of the existing, 13.5-per-cent manufacturer’s tax at the same time will result in the lowering of some prices. “There’s credits in the price of everything,” the finance minister said.

Shock: In many cases, the only factor insulating the middle class against inflation and escalating taxes is having two incomes. Thomas Atkinson, director of the opinion research program for Toronto-based Hay Management Consultants, an international human-resource consulting company, says that women have literally become the “shock absorbers” against income decline. “Real rises in household income have come entirely as a result of activity by women,” he says. Indeed, the number of families with two wage earners has increased by 100 per cent in the past 20 years, and in 1986, the last year for which such figures are available, 62 per cent of all Canadian families had double incomes. Ted and April Vaughan, both 26, of Halifax, are expecting their first child this month and plan to have more, but they are resigned to April’s continuing to work. Said

MORE THAN HALF ARE IN THE MIDDLE

Canadian household income distribution

ment of municipal affairs: “If my wife stays home to take care of the child, we’re facing life on an income of $20,000. We can’t do it.” There is a downside to being in the work-

Ted, an assessor for the Nova Scotia depart-

force for many women, who say that they are reluctantly leaving small children at home. As well, they worry that their children will lose the advantages of a stable family life, no matter what they do. Said Decaire, who works part time: “It’s too bad a wife has to work and leave the kids at home. We just have a duplex. If I was working full time, we could afford a house.”

Rate: To make matters worse, middleclass savings, which once provided a psychological and fiscal cushion, have dropped dramatically. The savings rate has fallen from about 15 per cent of earnings 10 years ago to the current level of eight per cent. Ted Vaughan said that he does not even have a Registered Retirement Savings Plan, a simple way of reducing taxable income for middle-income wage earners. Said Vaughan: “I can’t afford them.”

Another sign of the middle-class squeeze is mounting consumer debt, as people borrow to realize their

dreams. In fact, Canadians owe twice as much now as they did in 1982, a total of $217 billion last year. “Con^ sumers have run down ^ their savings and rei placed them with debt,” says Ottawabased consultant Ross. “They feel pinched, but they don’t want to cut back, so they borrow and hope it will improve.”

Meanwhile, moderate vacations and regular entertainment have become a luxury for many

members of the middle class.

Said Roger Gale’s wife,

Annde Paxton: “We go away weekends to a small, oneroom cabin on the Gulf Islands. Our youngest daughter sleeps under a table, and our son sleeps outside in a tent.”

And Peter Ripple, of Halifax, who supports his wife and four children on his $37,000a-year salary as an industrial arts teacher, says that he has been forced to cut back spending on food. To save money, the family grinds their own flour and bakes their own bread.

The Ripple family are building their own home for about $85,000, one that will be so energy-efficient that “you can heat it with a couple of hair dryers,” Ripple said.

Added Ripple: “For enter-

tainment, we taught our kids to read.”

And as the familiar touchstones of the middle-class dream begin to move out of reach, many Canadians are revising it (page 58). As they do, families are favoring more accessible extras, such as a new car instead of a home.

Future: Many economists and social-policy analysts say that Canada is at a financial crossroads that will determine the future shape of society. They add that if erosion of middle incomes continues, the next decade could produce an extremely polarized society—with a small rich layer at the top and a growing stratum of lower-income families at the bottom. The country would be wealthier, but there would also be much more poverty. And almost 80 per cent of a selection of Canadian experts on social trends polled by Hay Management last spring now say that they believe polarization will happen. Said Atkinson: “The signs of affluence will be all around—BMWs, expensive restaurants, inflated real-estate values. Many individuals will be forced to realize that they have no reasonable chance of

attaining these things—they will be locked out of the dream.”

Young Canadians will be among the hardest squeezed as income for new workers entering the workforce continues to fall. The incomes of those under 25 are already slipping sharply behind those of other age groups, and some economic forecasters say that many of them will never catch up. High-school dropouts, running at 30 per cent nationally, may be locked into low-income ghettos, as the so-called knowledge professions, such as medicine and high technology, * become more important. £

The potential result of wider 2 wage disparity could be drail ' ma tic—rising crime rates,

eroding social services and a two-party political system deeply split between conservative and socialist groups, said Gordon Betcherman, an economist with the Economic Council of Canada. He added: “One of the strengths of Canada is that a lot of people have had a stake in the

BORROWING M0RET0 PAY THE BILLS

Growth of household debt as a percentage of Income

country’s future. But if we develop a class problem, we could face the South American syndrome—political problems and social dissension.”

As well, government may not be able to ease the problem with a safety net of social welfare programs. Ottawa, saddled by a $28.9-million deficit that is twice as large as the U.S. deficit on a per-capita basis, may have neither the money nor the political will to support a huge underclass, Betcherman said.

Base: In the United States, where economists say that class polarization is already well advanced, Prof. Barry Bluestone of the University of Massachusetts in Boston says that something can be done. Bluestone, a political

science professor, told Maclean’s that a rebuilt industrial base, better education, higher wages and bolstered unions could all help stop the erosion of middle-class income.

For now, the middle class is tenaciously hanging on. According to Carleton University sociologist John Myles, the middle class itself is “a metaphor; it means a house in the suburbs, a car in the driveway, a microwave in the kitchen, and ballet lessons and Saturday-morning hockey for the kids.” It is a dream that all of society was invited to share at the end of the Second World War, Myles said. But, he added: “Now, ask yourself what happens if you begin to polarize society into BMW drivers and busriders. What you get is a potential for conflict.” Gale and many other middle-class Canadians interviewed by Maclean’s tend to see the income gap widening into a chasm. They reluctantly acknowledge that they no longer expect to retire in comfort and that they long ago gave up the idea of ever attaining the affluence enjoyed by their parents. But they also hold out hope that

part of the middle-class squeeze—the trend towards a stratified society—can be reversed. Said Gale: “We are fools if we don’t put a stop to this. It is a failure of democracy if we don’t find truthful alternatives.” That is a chorus that may be heard with increasing frequency if the gulf between rich and poor continues to widen.

PATRICIA CHISHOLM

RUSSELL WANGERSKY

GLEN ALLEN

DAVID LINDORFF

SHONA McKAY

MAXINE McDOWELL

DEREK WOLFF