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Queens International Institute on Social Policy August 19, 2014
Andrew Heisz and Brian Murphy
Income Statistics Division, Statistics Canada
The role of taxes and transfers in reducing income inequality
14-08-19 Statistics Canada • Statistique Canada 2
Introduction
§ Canadian families receive income from market sources and government transfers, and pay income taxes.
§ The amount by which the government sector reduces income inequality through the tax and transfer system is called “Income Redistribution”
§ There has been a longstanding interest in understanding the role of income redistribution as a mitigating or corrective factor against rising market inequality.
• Beach and Slotsve (1996) • Heisz (2007) • Frenette, Green and Milligan (2009) • Milligan (2013) • Davies (2013)
14-08-19 Statistics Canada • Statistique Canada 3
Objectives
§ Review the results on the effect of income redistribution on income inequality
§ Add information on redistribution by tax and transfer program
§ Emphasise the distinction between “redistribution” and “progressivity” in taxes and transfers
14-08-19 Statistics Canada • Statistique Canada 4
Redistribution vs. Progressivity (1)
§ “Redistribution” is the amount by which a particular tax or transfer reduces income inequality
§ “Progressivity” is a measure of how much a tax or transfer differs from proportionality
§ e.g.
• A transfer that is targeted at lower incomes such as the Canada Child Tax Benefit
• A tax that rises with income, such as the Personal Income Tax
14-08-19 Statistics Canada • Statistique Canada 5
Redistribution vs. Progressivity (2)
§ The amount of redistribution generated by a tax or transfer depends upon its progressivity and its average (tax or benefit) rate
• Intuitively, for two equal sized taxes or transfers (in terms of the average tax or transfer rate), the more progressive tax or transfer would have a larger redistributive effect
§ Separate indicators for redistribution and progressivity would provide analysts and policy makers additional tools indices by which to evaluate the effect of changes in the tax and transfer system on income inequality
14-08-19 Statistics Canada • Statistique Canada 6
Methods (1) Kesselman and Cheung (2006) Total redistribution (R) is the absolute difference in pre- and post- redistribution GINI coefficients (Musgrave and Thin (1948) and Reynolds and Smolensky (1977)) R=GM-GAT (1) Separate redistribution indices for taxes (subscript t) and transfers (subscript b) can be described as: Rt=GT-GAT (2) and Rb=GM-GT (3). Where: GM is the GINI of market income GT is the GINI of total income GAT is the GINI of after-tax income
14-08-19 Statistics Canada • Statistique Canada 7
Methods (2) • Progressivity index: Kakwani (1977, 1984)
• Tax concentration curve: the cumulative share of taxes paid, by income rank • if a tax were proportional, the concentration curve of taxes would lie on top of the Lorenz curve of pre-tax income
• the concentration curve of a progressive tax would lie outside the Lorenz curve
• Tax concentration index (Ct): twice the area between the tax concentration curve and the equality line
• twice the area between the Lorenz curve and the tax concentration curve is the Kakwani index of tax progressivity (Pt) • Pt = Ct – GT
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0 20 40 60 80 100
Cum
ulat
ive
shar
e of
tota
l inc
ome,
taxe
s
total income centile
Lorenz curve, total income
tax concentration curve
equality line
14-08-19 Statistics Canada • Statistique Canada 8
Methods (3) • Likewise, twice the area between the Lorenz curve of pre-transfer income and the transfer concentration curve provides an index of transfer progressivity (Lambert 1985) • Pb = GM – Cb
Where • Transfer progressivity (Pb) • Concentration index of transfers (Cb)
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0 20 40 60 80 100
Cum
ulat
ive
shar
e of
mar
ket i
ncom
e, tr
ansf
ers
market income centile
Lorenz curve, market income
transfer concentration curve
equality line
14-08-19 Statistics Canada • Statistique Canada 9
Methods (4) taxes
(5) (6)
transfers (8) (9)
• equations (5) and (8) are approximate
• the method can be used for total taxes or transfers, or individual taxes or transfers
• Speaks to the issue of “targeting” programs through raising progressivity and program size (through average tax/transfer rates)
14-08-19 Statistics Canada • Statistique Canada 10
Data 1976-to-1997 Survey of Consumer Finances (SCF) and the 1993-to-2010 Survey of Labour and Income Dynamics (SLID)
§ Market income 1. Earnings 2. Net Self employment income 3. Asset income
§ Transfers: 1. C/QPP, 2. OAS/GIS, 3. Child Benefits (FA, CTC, CTB, WIS, CCTB, NCBS, UCCB) 4. Social Assistance (SA) 5. Employment insurance (EI) 6. Other transfers (Workers compensation, WITB, provincial tax credits, others)
§ Taxes 1. Provincial and federal personal income taxes – Does not include payroll taxes, consumption taxes, property taxes.
Social Policy Simulation Database and Model (SPSD/M)
§ Used to test sensitivity, model payroll taxes
0
0.5
1
1.5
2
2.5
3
1976 1981 1986 1991 1996 2001 2006 2011
% o
f GD
P
C/QPP OAS/GIS EI Child benefits Social assistance
0
5
10
15
20
25
30
35
40
45
1976 1981 1986 1991 1996 2001 2006 2011
$bill
ion
(201
1 do
llars
)
C/QPP
OAS/GIS
EI
Child benefits
Social assistance
Data
14-08-19 Statistics Canada • Statistique Canada 11
Relative sizes of transfers Total transfers Transfers as a % of GDP
Data
14-08-19 Statistics Canada • Statistique Canada 12
Relative sizes of taxes Total income taxes Income taxes as a % of GDP
0
20
40
60
80
100
120
140
160
180
200
1976 1981 1986 1991 1996 2001 2006 2011
$bill
ion
(201
1 do
llars
)
Provincial
Federal
Provincial and Federal Income Taxes
0
2
4
6
8
10
12
14
1976 1981 1986 1991 1996 2001 2006 2011
% o
f GD
P
Provincial
Federal
Provincial and Federal Income Taxes
Data
14-08-19 Statistics Canada • Statistique Canada 13
Redistributive effect of taxes and transfers GINI coefficients, Market, Total and After-tax Income Redistribution (R) estimates, transfers, taxes and total redistribution
0.000
0.100
0.200
0.300
0.400
0.500
1976
1981
1986
1991
1996
2001
2006
2011
GIN
I coe
ffici
ent
GINI total income
GINI market income
GINI after-tax income
0.000
0.020
0.040
0.060
0.080
0.100
0.120
0.140
0.160
1976
1981
1986
1991
1996
2001
2006
2011
Red
istr
ibut
ion
(r) E
ffect
Redistribution from Transfers (Rb)
Total Redistribution (R)
Redistribution from Taxes (Rt)
Data
14-08-19 Statistics Canada • Statistique Canada 14
Decomposing transfer redistribution into average benefit rate and transfer progressivity
0.000
0.020
0.040
0.060
0.080
0.100
0.120
1976
1981
1986
1991
1996
2001
2006
2011
Tran
sfer
Red
istri
butio
n (R
b)
0
0.05
0.1
0.15
0.2
0.25
1976
1981
1986
1991
1996
2001
2006
2011
Aver
age
Ben
efit
Rat
e (b
)
0
0.15
0.3
0.45
0.6
0.75
0.9
1976
1981
1986
1991
1996
2001
2006
2011
Tran
sfer
Pro
gres
sivi
ty (P
b)
0.1
0.15
0.2
0.25
0.3
1976
1981
1986
1991
1996
2001
2006
2011
Tax
Pro
gres
sivi
ty (P
t)
0
0.05
0.1
0.15
0.2
0.25
1976
1981
1986
1991
1996
2001
2006
2011
Aver
age
Tax
Rat
e (t)
0.000
0.020
0.040
0.060
0.080
0.100
0.120
1976
1981
1986
1991
1996
2001
2006
2011
Tax
Red
istri
butio
n (R
t)
Data
14-08-19 Statistics Canada • Statistique Canada 15
Decomposing tax redistribution into average tax rate and tax progressivity
Data
16
Redistribution from transfers (Rb)
0.000
0.005
0.010
0.015
0.020
0.025
0.030
1976
1981
1986
1991
1996
2001
2006
2011
OAS/GIS
0.000
0.005
0.010
0.015
0.020
0.025
0.030
1976
1981
1986
1991
1996
2001
2006
2011
C/QPP
0.000
0.005
0.010
0.015
0.020
0.025
0.030
1976
1981
1986
1991
1996
2001
2006
2011
Child Benefits
0.000
0.005
0.010
0.015
0.020
0.025
0.030
1976
1981
1986
1991
1996
2001
2006
2011
Social Assistance
0.000
0.005
0.010
0.015
0.020
0.025
0.030
1976
1981
1986
1991
1996
2001
2006
2011
EI
0.000
0.005
0.010
0.015
0.020
0.025
0.030
1976
1981
1986
1991
1996
2001
2006
2011
Other Transfers
Data
17
Progressivity indices of transfers (Pb)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1976
1981
1986
1991
1996
2001
2006
2011
OAS/GIS
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1976
1981
1986
1991
1996
2001
2006
2011
C/QPP
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1976
1981
1986
1991
1996
2001
2006
2011
Child Benefits
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1976
1981
1986
1991
1996
2001
2006
2011
Social Assistance
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1976
1981
1986
1991
1996
2001
2006
2011
EI
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1976
1981
1986
1991
1996
2001
2006
2011
Other Transfers
Data
18
Average transfer rate (b)
b= total benefits / total market income
0.00
0.01
0.02
0.03
0.04
1976
1981
1986
1991
1996
2001
2006
2011
OAS/GIS
0.00
0.01
0.02
0.03
0.04
1976
1981
1986
1991
1996
2001
2006
2011
C/QPP
0.00
0.01
0.02
0.03
0.04
1976
1981
1986
1991
1996
2001
2006
2011
Child Benefits
0.00
0.01
0.02
0.03
0.04
1976
1981
1986
1991
1996
2001
2006
2011
Social Assistance
0.00
0.01
0.02
0.03
0.04
1976
1981
1986
1991
1996
2001
2006
2011
EI
0.00
0.01
0.02
0.03
0.04
1976
1981
1986
1991
1996
2001
2006
2011
Other Transfers
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1976
1981
1986
1991
1996
2001
2006
2011
Progressivity (Pb)
0.00
0.01
0.02
0.03
0.04
1976
1981
1986
1991
1996
2001
2006
2011
Average Transfer Rate (b)
0.000
0.005
0.010
0.015
0.020
0.025
0.030
1976
1981
1986
1991
1996
2001
2006
2011
Redistribution (Rb)
Data
14-08-19 Statistics Canada • Statistique Canada 19
Child Benefits: Over Time
Steady, 1.5% of market income
Increase in progressivity
Increase in redistribution
Data
14-08-19 Statistics Canada • Statistique Canada 20
Redistribu*on from child benefits, 2011 Average benefit rate (b)
Progressivity (Pb)
Redistribu*on (Rb)
Canada child tax benefit 0.015 0.836 0.012 Na*onal child benefit supplement 0.008 1.183 0.009 Universal child care benefit 0.008 0.519 0.004 families with children only
§ while the UCCB and NCBS were of similar size in 2011, the NCBS was more progressively distributed, yielding a greater reduction in inequality
Child Benefits: Across Programs
1. Results for the Working Income Tax Benefit: • The WITB had a high progressivity index, ranking between the CCTB and NCBS • The size of the program is comparatively small, and thus it reduces inequality by less.
2. How did tax progressivity rise while the average income tax rate fell? Average tax rates fell faster at the bottom of the income distribution
3. Results including payroll taxes: payroll taxes are regressive, and reduce the
overall progressivity of the tax system, but do not change total redistribution by very much
4. Other sensitivity tests: 1. Ordering of individual transfers 2. Estimates of progressivity holding underlying population constant
14-08-19 Statistics Canada • Statistique Canada 21
Results in the paper but not the presentation
1. Reviewed results on income redistribution • increases in market income inequality that occurred during the 1980s and 1990s recessions
were completely offset by a tax and transfer system which became more redistributive, such that there was no increase in after-tax income inequality up to 1995
• during the second half of the 1990s, the tax and transfer system became somewhat less redistributive, and after-tax income inequality increased
• A recent rise in market income inequality (2009-2010) was offset by rising transfer redistribution
2. Presented statistics on redistribution by transfer program • 1980s and early 1990s rise in redistribution associated with a growth in redistribution across
several transfer programs • late 1990s decline mainly associated with declines in SA and EI redistribution
3. Presented indicators for describing redistribution and progressivity that would have applications in policy development and evaluation • how redistribution through taxes has remained high despite falling tax rates • where a given sized intervention through the tax and transfer system would yield the greatest
redistributive effect
14-08-19 Statistics Canada • Statistique Canada 22
Conclusion
Data
14-08-19 Statistics Canada • Statistique Canada 23
Redistribu*on from WITB, 2011 Average benefit rate (b)
Progressivity (Pb)
Redistribu*on (Rb)
Canada child tax benefit 0.001 0.915 0.001 families with children only
§ The WITB had a high progressivity index, ranking between the CCTB and NCBS
§ The size of the program is comparatively small, and thus it reduces inequality by less.
Working Income Tax Benefit
Understanding how progressivity rose while the average income tax rate fell: Rates fell faster at the bottom of the income distribution
14-08-19 24
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
0 10 20 30 40 50 60 70 80 90 100
Aver
age
Tax
Rat
e, R
atio
:201
0/19
91
Average tax rate 1991
Average tax rate 2010
Ratio: 2010/1991
Source: SPSD/M Income centile
Adding in Payroll taxes: Payroll taxes are regressive, but do not affect overall redistribution very much
14-08-19 Statistics Canada • Statistique Canada 25
Redistribu*on from different taxes, 2011, Modeled Average tax rate
(t) Progressivity (Pt) Redistribu*on (Rt) Federal income tax 0.100 0.240 0.026 Provincial income tax 0.062 0.223 0.014 Federal plus provincial taxes 0.162 0.233 0.044 Federal payroll tax 0.033 -‐0.059 -‐0.002 Federal and provincial income taxes and federal payroll taxes 0.195 0.184 0.043
Source: SPSD/M