The role of taxes and transfers in reducing income inequality INEQUALITY IN CANADA: DRIVING FORCES, OUTCOMES AND POLICY FEBRUARY 24 & 25, 214 Andrew Heisz and Brian Murphy Income Statistics Division, Statistics Canada
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 (27) Frenette, Green and Milligan (29) Milligan (213) Davies (213) 2 214-2-27
Objectives Review the stylised facts 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 3 214-2-27
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 4 214-2-27
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 5 214-2-27
Methods (1) Kesselman and Cheung (26) Total redistribution (R) is the absolute difference in pre- and post- redistribution GINI coefficients (Musgrave and Thin (1948) and Reynolds and Smolensky (1977)) R=G M -G AT (1) Separate redistribution indices for taxes (subscript t) and transfers (subscript b) can be described as: R t =G T -G AT (2) and R b =G M -G T (3). Where: G M is the GINI of market income G T is the GINI of total income G AT is the GINI of after-tax income 6 214-2-27
Methods (2) progressivity index: Kakwani (1977, 1984) global index related to the GINI index if a tax were proportional, the concentration curve of taxes (the cumulative share of taxes paid, by pretax income) 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 the area between the Lorenz curve and the tax concentration curve is the Kakwani index of tax progressivity Cumulative share of income, taxes Figure 1a: Graphical depiction of the progressivity index for taxes 1.9.8.7.6.5.4.3.2.1 2 4 6 8 1 Rank of total income Lorenz Curve, Total Income Concentration Curve, Taxes Equality Line 7 214-2-27
Methods (3) likewise the area between the Lorenz curve of pre-transfer income and the transfer concentration curve provides an index of transfer progressivity (Lambert 1985) Cumulative share of market income, transfers Figure 1b: Graphical depiction of the progressivity index for transfers 1.9.8.7.6.5.4.3.2.1 2 4 6 8 1 Percentille rank of total income Lorenz curve, market income Concentration curve, transfers Equality line 8 214-2-27
Methods (4) taxes transfers (5) (8) (6) (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) 9 214-2-27
Data 1976-to-1997 Survey of Consumer Finances (SCF) and the 1993-to-21 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) 1 214-2-27
Data Redistributive effect of taxes and transfers GINI coefficients, Market, Total and After-tax Income Redistribution (R) estimates, transfers, taxes and total redistribution.5.16.45 GINI market income.14.4.35 GINI total income.12 Total Redistribution (R) GINI coefficient.3.25.2.15 GINI after-tax income Redistribution (R) effect.1.8.6 Redistribution from Transfers (Rb).1.4 Redistribution from Taxes (Rt).5.2 11 1976 1978 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 1976 1978 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 Year 214-2-27 Year
Data Decomposing transfers into average benefit rate and transfer progressivity redistribution, average benefit rate 12.12.1.8.6.4.2 Redistribution from transfers (Rb) 1976 1978 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 average benefit rate progressivity index.2.15.1.5 1.2.8.6.4.2 1 Average benefit rate (b) 1976 1978 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 Transfer progressivity (Pb) 1976 1978 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 214-2-27
Data Decomposing taxes into average tax rate and tax progressivity.25.5.45.4.35 Redistribution from taxes (Rt) Average tax rate.2.15.1.5 Average tax rate (t) Redistribution.3.25.2.3 1976 1978 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 13.15.1.5 1976 1978 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 Year Progressivity index.25.2.15.1.5 Progressivity of taxes (Pt) 1976 1978 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 214-2-27
Data Redistribution from transfers OAS/GIS.3.25.2.15.1.5. 1975 198 1985 199 1995 2 25 21 C/QPP.3.25.2.15.1.5. 1975 198 1985 199 1995 2 25 21 Child Benefits.3.25.2.15.1.5. 1975 198 1985 199 1995 2 25 21 Social Assistance.3.25.2.15.1.5. 1975 198 1985 199 1995 2 25 21 EI.3.25.2.15.1.5. 1975 198 1985 199 1995 2 25 21 Other transfers.3.25.2.15.1.5. 1975 198 1985 199 1995 2 25 21 14
Data Progressivity indices of transfers (Pb) OAS/GIS C\QPP Child Benefits 1.2 1.2 1.2 1 1 1.8.8.8.6.6.6.4.4.4.2.2.2 1975 198 1985 199 1995 2 25 21 1975 198 1985 199 1995 2 25 21 1975 198 1985 199 1995 2 25 21 1.2 1.8.6.4.2 Social Assistance EI Other transfers 1.2 1.2 1 1.8.8.6.6.4.4.2.2 1975 198 1985 199 1995 2 25 21 1975 198 1985 199 1995 2 25 21 1975 198 1985 199 1995 2 25 21 15
Data Average transfer rate (b).4 OAS/GIS.4 C/QPP.4 Child Benefits.3.3.3.2.2.2.1.1.1 1975 198 1985 199 1995 2 25 21 1975 198 1985 199 1995 2 25 21 1975 198 1985 199 1995 2 25 21.4 Social Assistance.4 EI.4 Other Transfers.3.3.3.2.2.2.1.1.1 1975 198 1985 199 1995 2 25 21 1975 198 1985 199 1995 2 25 21 1975 198 1985 199 1995 2 25 21 b= total benefits / total market income 16
Data Child Benefits: Over Time Redistribution (Rb) Average transfer rate (b).3.4.25.3.2 Steady, 1.5% of market income.2.1.15 Increase in redistribution 1975 198 1985 199 1995 2 25 21.1.5. 1975 198 1985 199 1995 2 25 21 Progressivity (Pb) 1.2 Increase in progressivity 1.8.6.4.2 1975 198 1985 199 1995 2 25 21 17 214-2-27
Data Child Benefits: Across Programs Redistribu*on from child benefits, 21 Average benefit Progressivity rate (b) (Pb) Redistribu*on (Rb) Canada child tax benefit.16.81.13 Na*onal child benefit supplement.9 1.166.1 Universal child care benefit.8.52.4 families with children only while the UCCB and NCBS were of similar size in 21, the NCBS was more progressively distributed, yielding a greater reduction in inequality 18 214-2-27
Data Results In the paper, but not the presentation Redistribution and progressivity by tax program A look at the WITB Analyses holding market distributions constant using the SPSDM Sensitivity analysis 19 214-2-27
Conclusion 1. Reviewed results on income redistribution increases in market income inequality that occurred during the 198s and 199s 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 199s, the tax and transfer system became somewhat less redistributive, and after-tax income inequality increased A recent rise in market income inequality (29-21) was offset by rising transfer redistribution 2. Presented statistics on redistribution by transfer program 198s and early 199s rise in redistribution associated with a growth in redistribution across several transfer programs late 199s 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 2 214-2-27