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