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Monday, May 1, 2017

Stop Blaming the Rich

Posted by Tim Stobbs on September 22, 2015

Okay, are you sick of this never ending federal election campaign in Canada?  Goodness knows I am already.  Yet perhaps the single thing that is pissing me off the most during this campaign is the idea of ‘let’s blame the rich’ theme. Or really more actually I’m not terribly impressed that a few of the proposals out there are to roll back the latest TFSA limit increase since ‘only the rich can use them’.

I okay with general idea of fairness.  After all no one likes to be screwed over in life and it does make entirely sense to me to have progress tax brackets that increase as income goes up.  After all if I am earning more I can easily pay a bit more to help out those that don’t earn much.  I don’t consider that unfair, but rather practical.

Yet rolling back the TFSA limit increase because only the rich can use is a damn crappy reason.  Um, news flash people…those how have built business, got high paying jobs and actually save some money to get rich…the system wasn’t fair to begin with.

For example, RRSP contributions are based on last years income up to 18% (to a given maximum), so the reality is that is actually worse for lower income people.  Since the more you earn beyond perhaps $40,000 a year it gets easier to save that amount.  Meanwhile the TFSA limit is equally to everyone over 18.  Even when it means the lower income people can potentially save a MUCH higher percentage of their income as compared to a person making $100,000/year.  Case in point the $10,000 limit of $40,000 is 25% of their income, which is WAY higher than the RRSP percentage.  Yet for the $100,000 income person the $10,000 TFSA limit is only 10%.

Then when we get to investment gains those that save also get some extra breaks, capital gains are only taxed at half of your marginal tax rate and Canadian dividends also benefit from a significant tax break.  The dividends are such a good break that if you earn less than $44,000/year they actually end up being tax free.

The system is built around encouraging people to save and invest, so those that do are rewarded by paying less tax.  Fairly simple right?  Yet it amazes me that people want to blame the rich.  Did you ever consider the fact the ‘rich’ may have started off just like you but rather than spend their money they decided to save it instead.  They learned a bit about investing and made ever more money.  It was often a hard long road, but after a number of years and the miracle of compound interest they are doing well.

Compared to those at my age and savings I’m likely considered rich or top 20% at least.  Yet the money just didn’t appear in my accounts in a puff of smoke…I got a degree and then a good job.  Then I saved for a decade straight likely spending less money than you did last year…that is why I have a net worth of over $750,000.  So go ahead and take away the TFSA limit increase for all I care…just stop blaming me for your problems and perhaps start to save something yourself.

Comments

26 Responses to “Stop Blaming the Rich”
  1. I say the same thing, myself.

    Middle class however is definitely disappearing but maybe expectations of what middle class is, or “rich” are also unrealistic.

  2. Scott says:

    Well, I have a net worth of just over 1MM (300k house and 720k index funds) at age 42. No degree, just did really well in sales and saved/invested. But now laid off and burnt out. Don’t think I can work anymore. Wife is ok working and making about 20-25k year Part time.
    3 kids 8-10-12. Monthly total spend averages to $2700

    Should I retire?

  3. Rick says:

    Hi Scott,

    I’m in a somewhat similar boat, pretty much burnt out in my mid-40’s after many years of high-paced brain drain. Instead of considering actual retirement, I switched to doing physical work at a near full time capacity. I feel happier, healthier, and still have a bit of an income as not working would make things too tight in my books. Maybe there’s something you would enjoy as well?

    Cheers,

    Rick

  4. dana says:

    About time someone said this. I am so tired of people around me thinking that I have a magic wand. While they were out there buying new cars, commuting hours a day, paying cleaning companies and eating out 3 days a week, I was saving. No magic there just different priorities.

  5. Tim Stobbs says:

    @Scott – It depends a bit on the details, but on the surface what you are thinking about is reasonable (assuming one of you is willing to earn some income to make up the short fall from your investments since they are just a bit short of your spending).

    Also Rick has a point…perhaps you are just suffering burnout. Have you considered taking a sabbatical for 6 months to a year? Or just out right quit and call it that. That way you could recover from work and then make a decision. It just may be unfair to your wife to assume she wants to work part time until you can collect CPP and OAS. She may not have to depending on the details, but taking a break could give you some time to think and recover.

    Best of luck,
    Tim

  6. Lisa says:

    I am not “rich”, but would like to be someday. At the beginning of the year my goal was to max out the yearly tfsa contribution room of $5500, and I believe I am on track to do so for the first time. When they changed it to $10000, I thought ” I could never save that much”, but, like the contribution room I haven’t used in the past, it would still be available if I did have a windfall. I hope it remains at 10g’s. Even if I can’t use it this year or next, maybe I can in 10 years.

  7. Andrew says:

    ‘different priorities’ I love that, well said dana. I see the people I work with eating out all the time, driving brand new cars, spending 300 plus a month on a crazy cable package.. It is almost as if they are walking blind through life and just assume one day they will retire. I like to ask them what their retirement plan is and sometimes thats all it takes to get them thinking about themselves and not the stuff they consume. “just stop blaming me for your problems and perhaps start to save something yourself.” Well said!

  8. Master Nerd says:

    Totally agree! They make it seem like the rich just magically got rich over night. Most rich people had to bust their ass to get to where they are and put in the sweat, blood, and tears to earn their wealth. There also frankly, aren’t enough rich people to tax to pay for all of the things they want to.

    How about instead of taxing the rich we institute mandatory personal finance and investment classes in schools, so people actually know what to do with money once they get it. The fact that those classes are virtually non-existant (besides accounting) in most elementary/jr/high schools boggles my mind. We want people to save and understand how money works, but we don’t provide the training, knowledge, and exposure to it.

  9. Scott says:

    Thanks for the responses.

    @Rick – That is an idea. Not sure what type of other work I would find satisfying though

    @ Tim – I believe you are planning to retire on less than what I have? I think my expenses are higher than yours – perhaps I can find ways to cut them down.

    I may consider going back to school and retraining in something completely different but enjoyable – is another option. Going back at 42 seem weird.

    Part time is an option to…again not sure what that would look like.

    Scott

  10. Scott says:

    To add: There are monthly Canadian gov kids benefits. Right now we get $400/month. If our income goes down – these go up to as high as $1200plus a month…(on the extreme end)

    So this is part of the math….plus OAS, CPP and maybe GIS later in life. I used to dislike socialism, starting to change my mindset..lol

  11. Rick says:

    Well said. There are not enough”rich people” to pay all they taxes they want. If anyone feels the government is going to “look after them” they are in for a rude awakening. Interesting, that a “trust fund kid”; who never had a real job; wants to reduce the single best retirement vehicle, TFSA’s. What a pin head.

  12. GPS says:

    Hi all,
    I’m a Calgarian now living in the UK. The conversations are very different on both sides. I think you’re pitting the debate on a false linear argument when it actually has multiple sides to it.

    1) With regards to TFSA limit.
    In the UK, the ISA limit (TFSA) has just increased to £15,000 from £10,000. But this does show that Canada could maybe think about increasing their TFSA allowances.

    2) Working in the public sector though, I can completely understand the “Blame the rich mentality”. I think obviously the readers of this blog are privileged enough who make enough money that can max their TFSA contributions. If the government only had $100 to spend, would we rather have it incentivse people to save more than $5000 or to spend more on essential services the poor needs (who can barely save money to put it in their TFSA, I’m talking about the truly needy)? For example, the average salary in the UK is £25k, those people would struggle to save £10k per person, never mind £15k. Isn’t this taking from the poor and benefiting the rich?)

    At what point should we stop increasing the TFSA limit?

    Obviously, the conversation is not a linear argument. Hopefully the government can have enough money to help people who cannot earn enough and increase the limit. I would rather they take away from the military budget for example.

  13. Paul N says:

    I have to agree with the title of this article. First I feel the definition of “rich” is difficult to define. I fully agree that people that “seem” well off are getting bashed for no reason.

    I don’t feel I’m rich at this point in life. Although I have a paid off home and some investments that could carry me for a few years, cash etc., how fast will that disappear if you stopped working today without curbing your lifestyle? But to a person earning $30K a year apparently I’m rich. You can also bet we will be the ones that will get shafted in any of the redistribution schemes coming out of this election under the guise of “taking it from the wealthy”. How else will they get the money realistically. The very wealthy find loopholes and can protect some of their wealth. Although I feel most still pay significant taxes. The poor don’t have any money. So it would be coming from the responsible middle class as always.

    In one of your points you wrote that $10,000 was 10% of $100,000.00 to put in your TFSA. Yes it is but… a person making %100,000 has a marginal tax rate of 36% which is $36,000.00. So in real world numbers, putting $10K in your TFSA is whats left over from $64,000 (16%). Also someone making $30,000.00 is taxed around 25% which comes out to $7,500.00. So you also see as an individual, a “rich person” already pays much more of the overall tax burden used for everyone’s benefit.

    I also like asking this question. What amount of tax IS actually fair? Every year the person paying making $100,000. will most likely pay $50,000. to $60,000. in different forms of taxes when you toss in all the other taxes they pay. So we are paying for our family and probably 2 others we don’t see. So we do pay enough taxes. The little breaks we get (like TFSA) aren’t that significant in relation to the taxes we pay. So again agreeing with your last points, leave us alone and everyone else count yourselves lucky that someone freely gives up that amount of money to others that bash them and constantly complain life’s not fair. Your biting the hands that feed.

  14. Edward says:

    I’m very curious as to why somebody who has kids and buys an expensive house is considered “middle class” and needs tax breaks whereas someone who lives simply and puts the same $10K a year into a TFSA is now considered a “rich person” worthy of punishment?

  15. GCAI says:

    I agree with the gist of this article however I cannot get my head around how “progressive” taxation is “fair”. Just because I can “afford” more it’s fair that I pay more? Huh?

    That would mean that when I go a buy a loaf of bread I should pay more for it because I earn/can afford to to pay more? Don’t think so and if implemented would cause some strong opposition.

    So I think the “progressive” (really it should be called punitive) tax structure is another “blame the rich and make them pay” scenario. Also I think this structure is in place to support a massive bureaucracy (think CRA and the tax industry trying to temper CRA) which would be dramatically smaller if we had a simple tax code such as a flat tax or a true consumption tax.

  16. uytterl says:

    Sorry Tim, but I have to call you out on this one. I generally approve of FI principles and practice many of them myself, but your straw-man argument is just that, and I challenge you as a fellow Canadian who might appreciate some of the excellent attributes of living in our country to perhaps re-think whether there might be a very good point buried in this otherwise stereotypical two-dimensional portrayal of the debate. I would argue that raising TFSA limits is indeed the ticking timebomb that will gut society precisely because it will, given time, make a mockery of the basic principal that everyone pays their fair share of taxes towards the public goods that make strong communities. Think of an average FIer couple who is 25ish today. Between RRSPs and TFSAs they could pay less than their fair share (thanks to RRSPs) during their working years, retire much earlier than you will (because they don’t have to account for more than nominal taxation), and with judicious complimenting of TFSA and RRSP withdrawals, pay next to nothing in taxes for the next 40-60 years. Think: couple both making use of basic personal exemption rates and just the right amount out of each person’s RRSP, topped up from there with each person’s TFSA. Combining TFSAs with RRSPs undermines the basic premise of RRSPs as being ‘delayed taxation’ and turns them into ‘almost never taxation.’ And using RRSPs during working years also limits the up-front taxation concept of TFSAs by lowering one’s tax bracket at the time of investment. Yet, social leeches that they are, these FIers will expect to send their kids to good public schools, go to their publicly-funded doctors when sick, drive/bike on publicly-funded roads, drink publicly-subsidized tap water and flush their toilets into publicly-subsidized sewers, and fully expect that should they need to call 911 one day that a publicly-funded someone will actually answer the publicly-funded phone and dispatch the appropriate publicly-funded service to their aid. This resulting unequal taxation is not due to ‘hard work’ or ‘delayed gratification’, both consequences that can be heartily approved of, but rather a system that allows one segment of society to become free riders at the expense of the rest. Can you really say that this isn’t a valid social concern?

  17. Paul N says:

    Uytterl

    Your points make zero sense. Someone making $100k will pay $50k in tax. If they are smart they will shelter may 5 or 10 grand a year of that. They (middle class and rich) still pay the lions share of taxes. The poor have breaks all the time and use the social safety net already sometimes even generationally. In fact a minimum wage earner will actually make more money in retirement then when working. Again I ask, how much tax should we pay? Maybe government should also practice being more responsible with the money collected from everyone first. Plenty of us are paying fully for all those services you mention. Many of us will never use them or barely use them.

  18. Frank says:

    @uytterl

    Your argument holds no weight.
    I don’t think that there are enough of us FI’ers to make much of any impact to society. If anything, and as a FI’er, I have better health and less chance of collecting Unemployment Insurance etc then people who are stressed out, needing more medical care due to Heart issues ect. Plus the taxes we pay initially is still very high compared to many -even with the RRSP contributions.

  19. Chris says:

    “Yet rolling back the TFSA limit increase because only the rich can use is a damn crappy reason.” 

    Then what is a good reason?

    The concept of these accounts is to encourage savings and investments, but those with high net worth don’t need the same incentive – they already save. If no one is advocating treating all investment income as tax-free then the next real question is how much ‘should’ be sheltered (incentivized). From a governmental perspective the limit should be set as to maximize the number of individuals accessing the program and not a dollar more. Otherwise they are losing out on tax revenue without any incremental gains.

    Since our social programs are not means-tested, they are income-tested, then this is a real balancing act. Of course parties of different political stripes are going to have a different view. “Fair” is a subjective term and anyone that has the means to save or invest in a TFSA only needs to look at the circumstances that brought them to that place in life to realize it isn’t a level playing field. This isn’t about “fair” – it is about achieving a goal.

    We all have they rules of the game (even if they change) and they apply equally to all of us. We also have the opportunity to influence those rules. Complaining from a place of privilege just seems petty.

  20. Dave says:

    I have to say Tim, it looks like you are getting lazy. I agree with your article as far as blaming the rich, but you really should be proofreading better. On average, I find one spelling/grammatical error per post, but this one is almost painful to read. A little proofreading goes a long way! Here are a couple:
    “I okay with general idea”
    “those how have built business”

  21. Gotim says:

    What bothers me is that the same people that try to reverse the TFSA increase are trying to expand CPP and seem to have no problem with defined benefit pensions.

    Consider someone like Mr. Stobbs who works in a Crown corp making $80-$100 a year and retiring at age 55 with a guaranteed pension of $50,000. That pension is based on actuarial principles, but an equivalent private-sector worker could not afford to run out of money at age 78 (the statistical age of death). This private-sector worker accordingly takes out a $50,000/yr annuity until age 90, which will cost him or her $1.5 to $2 million dollars. To save that amount in RRSPs, limits would have to be at least twice as high as they currently are – a maximum of $25,000 a year simply does not cut it, and most people are not even allowed to contribute the max.

    RRSPs alone are clearly not nearly enough to provide an equivalent level of savings to a defined-benefit pension. The TFSA expansion provides at least some level of equalization, but it still only brings savings up to a max of $35,000 a year, leaving private-sector workers still short a million compared to their public-sector peers. Yet political parties zero in on the TFSA while having no problem protecting pensions. To me, this is disingenuous and a reason I seem to be becoming more conservative in this election.

  22. Paul N says:

    @ Chris

    “Complaining from a place of privilege just seems petty.”

    You seem to take a position where there is no middle. Your above comment is a ridiculous statement. A lot of people simply make poor choices in life. Being a person who was never paid a a high salary, I can clearly tell you a small amount of discipline, smart choices and a simple long term plan sets you on the goal to success.

    I have worked my butt off sacrificing what other people claim are “necessities” but clearly are not. I won’t accept someone trying to label me as being “privileged”, it’s incorrect, and simply more whining from another person who can’t use common sense and prefers to blame everything but themselves for their own situation.

    Gotim makes great points as well. For all the noise the liberals are making about eliminating tax breaks for the rich, it’s simply a sleight of hand shell game. New taxes are created to make up for the breaks given to another group. Like for example these stupid road toll taxes on roads that should already be paid for by our gas taxes which also subsidies the transit system. Lets start charging people who use the transit system more so it sustains itself. Wouldn’t that just make some sense? Overall we should work towards less taxes not adding more.

  23. Chris says:

    @Paul N: First, my comments were addresses to the posted quote and Tim’s post in general.

    Second, your salary has nothing to do with privilege. It has to do with access to education, lack of discrimination based on gender or ethnic background, etc. just because someone else makes or made more money for you doesn’t mean they are privileged and you are not.

    Tax policies like the TFSA are designed to encourage the public to engage in “desirable” behavior. There is no moral right to tax-free savings just because you work hard.

    Here is a straw man argument, just to put a different spin on your point about taxes. TFSA’s reduce general revenue that can be spent on other things. Is it more important for someone who can save and invest to avoid taxes or is it more important to collect that money and spend it on Aboriginal education? TFSA limits is politics right now, not economic policy. We’re no more entitled to them than we are entitled to tax-free gasoline or alcohol.

    Yes, totally a straw man ridiculous argument because it is oversimplified. But I also grew up in Canada in the public school system, work hard, and make hard choices about where to spend, save or invest my money. That doesn’t mean I don’t recognize the advantages I have had along the way.

  24. Chris says:

    After hitting submit I recognize that using ‘alchohol’ or ‘gasoline’ as taxed consumtion goods is a very poor choice because of the possible conflation with Aboriginal treaty rights and taxation. I was trying to pick two highly taxed goods that are common. I could have easily said “tax-free milk or bread” and made the same point. I am aware of the sensitivity around these issues.

    Tim, please consider editing or deleting the above post if you think it does notprovide a positive contribution

  25. Tim Stobbs says:

    @Gotim – Um, I don’t have a DB pension…never had one. My crown got rid of them over a generation ago because it saw the writing on the wall…they are too costly to keep up. So other than a few old timers just about everyone that works there is on a defined contribution. I will have a pension no where near $50K a year at 55.

    @Dave – Yep, I rushed this one out the door and should have put it aside for an edit…so you are reading a first draft. Sorry.

    Tim

  26. Gotim says:

    Yikes – strike SaskPower (or is it SaskEnergy?) off my potential future employer list!

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