Income Inequality and Redistribution in Canada: 1976 to 2004
After remaining stable across the late 1970s and 1980s, family after-tax-income inequality rose during the 1990s. This increase occurred at the same time as a reduction in the generosity of several income transfer programs, including the Employment Insurance and Social Assistance Programs (in some provinces), and decreases in income tax rates. This potentially reflects a weakening of the redistributive role of the Canadian state.
However, while rising after-tax-income inequality can result from a weakening redistribution system, it can also result from rising inequality in family market (pre-tax, pre-transfer) income. In this report we address the following question: Is income redistribution playing a smaller equalizing role in recent years than it did in the past, or is increasing inequality being driven by rising familiy market-income inequality?
A close examination of after-tax income reveals that from 1989 to 2004, income fell for lower-income families but grew for middle- and higher-income families. Average income in the bottom 10% fell by 8% over this period, but rose by 8% at the median and by 24% in the top 10%. As a result, the absolute range between those with income in the bottom 10% and those in the top 10% also rose. In real dollars, after-tax income for a four-person family was stable at about $110,000 higher in the top decile compared to the bottom decile all through the 1976-to-1995 period, but grew thereafter, reaching $147,600 by 2004. This indicates that the increase in after-tax-income inequality is of significant absolute magnitude as well as relative magnitude.
Income polarization also rose over the 1990s. The share of Canadians with family after-tax income from 75% to 150% of the median after-tax income fell from 52.1% in 1989 to 47.3% in 2004, a drop of 4.8 percentage points. Closer inspection of the data reveals that the trend away from the middle class (defined by income) was both towards lower-income and higher-income persons. The share of persons with after-tax income below 75% of the median rose by 2.6 percentage points, while that share with income above 150% of the median rose by 2.0 percentage points.
The share of persons with adjusted income below one half of the 1979 level of adjusted family median income fell across the 1980s but rose in the 1990s, ending at 10.2% in 2004, which is slightly higher than it was in 1989.
There are several reasons to suspect that the role of the tax-transfer system in equalizing incomes may be different in the 2000s than in earlier decades. While the paper does not go in to these in great detail, we note that changes in social assistance and employment insurance eligibility and entitlement levels (these generally became more generous across the 1980s and then less across the 1990s), the introduction of new programs such as the Canada Child Tax Benefit and the Goods and Services Tax credit, as well as the maturation of the Canada Pension Plan and the Québec Pension Plan were important developments which may have affected the amount of income redistribution that is done through the transfer system. Moreover, increases in real tax rates across the 1980s, followed by their reduction in the 1990s, may have had implications for redistribution through the tax system.
This study shows that, after remaining stable for several decades, family after-tax-income inequality rose in the 1990s, settling at a higher level in the 2000s. At the same time, the share of middle-income families was reduced and the share of low- and high-income families grew larger. The absolute gap between bottom- and top-income families also increased in a substantive way, indicating that these increases in inequality have an important magnitude. These trends appear to have been driven by rising inequalities in income received from market sources (wages, salaries, self-employment income, private pensions and investment income) among families.
High-income Canadians
Brian Murphy, Paul Roberts and Michael Wolfson
Thresholds defined in nominal dollar terms are the
simplest. Absolute thresholds refer to a particular dollar
amount—for example, $100,000. Those with
incomes higher than a given figure are considered to
have high income.
Examples of commonly applied absolute nominal
thresholds include $250,000, the highest income
grouping used for many years by the Canada Revenue
Agency (CRA);2 $150,000, used in Statistics Canada’s
census tables; $100,000, used by the province of
Ontario in their ‘sunshine list’ made available under the
Public Sector Salary Disclosure Act (Campbell 1996); and
the threshold at which the top federal tax rate begins—
$113,804 in 2004.3
- In 2004, 5% of Canadian taxfilers had an income of $89,000 or more; only 1% reached $181,000 or more.
- In 2004, the top 5% of taxfilers received 25% of total income and paid 36% of income and payroll taxes.
- The prevalence of high income peaks in the 45-to-64 age group. In 2004, individuals of that age represented less than a third of all income recipients, but made up more than half of the top 5%.
- Calgary had the highest proportion of families with income over $250,000 in 2004, but Toronto had by far the most families with such incomes, almost one-third of the national total.
- Of the 1.2 million taxfilers who made up the top 5% of income recipients in 2004, three-quarters were men, even though men accounted for less than half of all taxfilers. However, since 1982 there has been an 11% increase in the portion of women in the top 5% of tax filers.
Average income and net worth
In 1999, the average income for the bottom 80% of families was $38,000 while their average net worth was about five times higher at $192,000. The top 1% had average income of $366,000 and average net worth of $1.9 million, also roughly five times income. It follows that both the average income and average wealth of the top 1% are about 10 times that of the bottom 80%. The implication is that some lower-income families have relatively high net worth (for example the elderly) while some high-income families have relatively low net worth (the young).
Not surprisingly, the importance of housing and vehicular assets declines as income increases. While houses and cars accounted for 31% of average net worth for the 80% of families with the lowest incomes, they accounted for only 16% for the top 1%. These top income families had 61% of their net worth in financial assets compared with 37% for the bottom 80%. Pension assets are far more evenly distributed—21% of net worth for the top 1% of families, 32% for the bottom 80%.
The ratio of taxes to total income rises with income. In 2004, the bottom 95% of the taxfiler population received 75% of income and paid 64% of taxes, while the top 5% received 25% of income and paid 36% of taxes.11
A number of different tax rates can be examined. Nominal (statutory) tax rates are provided in legislation and are higher for higher incomes. The marginal tax rate applies to the last dollar of income. These rates are sensitive to the kind of income and the unit of analysis—individual or family. The effective tax rate (ETR) is simply the ratio of taxes paid to total income.
For the bottom 95%, ETRs generally increased through the 1980s, remained roughly constant at just over 15% throughout the 1990s, and declined at the turn of the millennium, remaining steady through 2004. More fluctuation was evident in the high-income population because of high-income surtaxes and numerous changes to top federal tax brackets. They had a more pronounced rise in the mid-to-late 1980s, declining more sharply in 1988 with the introduction of tax reform, which reduced 10 brackets to 3 and converted many deductions to tax credits.
Over 85% of the 5% of Canadians with the lowest incomes in 2004 paid no income or payroll taxes (Chart F). While some individuals may have no income taxes payable, Employment Insurance and Canada or Quebec Pension Plan contributions may still be payable.
The proportion paying no taxes drops sharply after the first vingtile but remains over 40% until the 35th percentile. It then drops quickly to below 1% approximately two-thirds of the way up the income distribution.
Some 5% of individual taxfilers had incomes of $89,000 or more in 2004. Regardless of the threshold used, incomes in the upper tail of the distribution as well as the share of total income increased substantially from 1992 to 2004. In contrast, individuals in the bottom 50% to 80% generally saw little improvement in constant dollar income.
Compared with the U.S., Canada had significantly fewer high-income recipients in 2004, and their incomes were considerably less. High-income Canadians increasingly receive more of their income from employment than from other sources.
Investment income has been a decreasing proportion, even among those with the highest incomes.
Income Instability of Lone Parents, Singles and Two-Parent Families in Canada, 1984 to 2004
This paper examines income instability of lone parents, singles and two-parent families in Canada in the past two decades using tax data. We attempt to answer the following questions: Has there been a widespread increase in earnings instability among lone parents (especially lone mothers) and unattached individuals over the past 20 years? How do the trends in earnings instability among lone parents and unattached individuals compare to the trends among the two-parent families? What is the role of government transfers and the progressive tax system in mitigating differences in earnings instability across different segments of the earnings distribution among the above-mentioned groups? We find little evidence of a widespread increase in earnings instability in the past two decades and show that government transfers play a particularly important role in reducing employment income instability of lone mothers and unattached individuals.
Similar to Morissette and Ostrovsky (2005), we find that earnings instability varies considerably with employment income and is much higher among families in the bottom tertile (one third of all families) than among families in the top tertile. The magnitude of these differences varies for different age groups and family categories; however, it is fair to say that for two-parent families the bottom–top earnings instability ratio is generally smaller mostly due to lower instability in the bottom tertile.
In all age groups, social assistance appears to be the single most important factor reducing income instability of lone mothers. For lone mothers, SA plays a much greater role in reducing income instability than for the two-parent families. In the youngest age group, for instance, it reduces instability in the bottom tertile by 32%. As social assistance has little effect on the lone mothers in the top tertile, this also results in the largest drop in the differences between bottom and top tertiles (23%). The impact of social assistance on instability is somewhat smaller for the 45-to-49 age group although it is still larger than the impact of any other factors.
Employment insurance also lowers income instability of lone mothers. In all age groups, it is the second most important factor mitigating instability among lone mothers in the bottom tertile. Overall, the reduction in instability (relative to market income) due to EI and SA in the bottom tertile varies between 32% and 48%.
The role of the progressive tax system has two different aspects. On the one hand, in all age groups, the instability of the after-tax income in the bottom tertile is lower than the instability of the total income although the reduction is 6% at most, and in some age groups it is close to zero. On the other hand, in some age groups the tax system has a larger effect in the top tertile, so the after-tax difference between bottom and top tertiles is actually larger for the after-tax income than for the before-tax income.
Personal debt — PDF
Personal consumption expenditure constitutes a larger share of GDP in the U.S.
Consumer spending is a key contributor to a country's economic health. Consumer spending as a percentage of GDP is much lower in Canada, ranging from 52.8% to 58.9% over the last 25 years, compared with 61.4% to 70.0% in the U.S. In other words, consumer spending has boosted the economy more in the U.S. than in Canada.
Canadians pay more income taxes and transfers to government
Even though both countries have a progressive income tax system, their marginal tax rates, methods of taxation, and allowable deductions vary considerably. In Canada, a relatively larger share of personal income goes for federal and provincial income taxes, Canada or Quebec Pension Plan contributions, and Employment Insurance premiums (17.3% in 1980 and 23.4% in 2005). Americans, on the other hand, paid 18.3% and 18.7% of their income for federal and state income taxes, social security contributions, and unemployment insurance.1 The gap between total and disposable income has widened over time in Canada while remaining almost unchanged in the U.S. However, the mix of deductions in the U.S. has changed considerably: Income taxes accounted for 79.4% of deductions in 1980 compared with 57.7% in 2005..
Both Canadians and Americans have increased their debt-to-income ratios
Credit can be used to meet regular or unexpected consumption needs, or even to acquire assets. Debt load, measured by the ratio of total debt to disposable income was almost the same for Canadians and Americans at the beginning of the 1980s. After that, they parted ways: Americans had the greater debt load between 1983 and 1991 and Canadians between 1992 and 2000. From 2001, debt grew steadily in both countries and by 2002 had surpassed disposable income. By 2005, for each dollar of disposable income, Canadians owed $1.16 and Americans $1.24.
Some of the increased indebtedness between 2001 and 2005 may be attributed to relatively low rates of interest, easy credit through home equity loans, and increased limits and incentives on credit cards issued by competing financial institutions.
Canadians use more consumer credit for their personal spending
Between 1980 and 2005, consumer credit represented between 21 and 38 cents of each dollar of personal spending in Canada. In the U.S., the amount was between 19 and 27 cents. Since 1986, when the Reagan administration cancelled tax deductibility for interest paid on consumer loans, Americans have been using less of this kind of credit. Consequently, since 1988, the gap between the U.S. and Canada in the use of consumer credit has widened.
Non-homeowners in both countries, who have neither mortgage debt nor access to home-equity line of credit, can increase limits on their credit cards or use personal loans to finance unexpected needs or other budgetary shortfalls. 
On a per-capita basis, consumption expenditure outpaced disposable income in both Canada and the U.S.
Over the 1980-to-2005 period, per capita consumption expenditure in Canada more than tripled from $6,870 to $23,560, while disposable income rose proportionally less—$8,390 to $24,400 (2.9 times). In the U.S., expenditures and disposable income rose more steeply—from CAN$8,770 to $37,980 (4.3 times) and from CAN$9,710 to $39,260 (4.0 times). The disparity between Canada and the U.S. in both per-capita spending and disposable income has increased and, as consumer spending has outgrown disposable income, both Canadians and Americans have had to finance their spending through credit.
In both countries, total household debt outgrew consumer spending as well as disposable income
In terms of aggregates in their respective currencies, household debt rose in Canada from $134 billion in 1980 to $916 billion by 2005 (6.8 times), and in the U.S. from $1.3 trillion to 11.2 trillion (8.6 times). Even though inflation was almost the same in both countries, consumer spending and disposable income increased less in Canada. Consumer spending, for instance, rose from $168 billion to $760 billion in Canada and from $1.8 trillion to $8.7 trillion in the U.S.
Young pensioners
Ted Wannell
- Although public retirement pensions cannot be collected until one's seventh decade (age 60 for the Canada and Quebec Pension Plans, and 65 for Old Age Security), many private pension plans allow long-serving employees in their 50s to draw benefits. Tax data indicate that about one-fifth of workers begin collecting benefits from such plans before their 60th birthday.
- The pension take-up rate is very low (less than 1%) from ages 50 to 54. It spikes at age 55 (5% for men and 4% for women) as many plans commence unreduced benefits at this milestone, given sufficient tenure. This peak is not surpassed until workers exit their 50s.
- About half of young pensioners worked for pay the year after they began receiving their pension. However, much of that work was either part-time or intermittent since only 30% earned at least $5,000. Men were more likely than women to surpass the $5,000 benchmark (34% versus 26%).
- The probability of non-trivial re-employment falls as the age at retirement increases. Those who retired at 50 were almost twice as likely as those retiring at 59 to earn at least $5,000 in the following year.
- Very few young pensioners turn to self-employment as a significant source of income. Less than 1 in 10 earned some self-employment income, and 1 in 20 or less earned at least $5,000.
- Early pensioners generally retired from high-paying jobs. Their average earnings in the year before retirement were about 50% greater than those who did not retire. Among women, the post-retirement income of young pensioners exceeded the income of those who remained in the workforce.
- Young pensioners typically bring in about two-thirds of their pre-retirement income the year after they begin collecting their pension—very close to the 70% replacement rate recommended by many financial analysts. Pension income accounts for a greater proportion of the total income of women in this group (66% in 2004 compared with 61% for men).
The 2001 Census figures on income, released on Tuesday May 13, are telling us two very important stories. The first is that Canadian society is becoming increasingly polarized. The richest 10% of our population has seen its income grow by a whopping 14% while the bottom 10% has seen only a slight increase of less than 1%. Moreover the income of many working families has actually declined!
Overall, government transfers have decreased. Although Statistics Canada declined to reveal the dollar value of the decrease, they did provide analysis of the changing significance of government transfers to different income groups.
Among working age families, the proportion of total income represented by government transfers dropped over the decade, from 6.4% to 5.6%. This drop did not actually begin until after 1995, and it reversed a trend of growth in government transfers to working age Canadians which had been evident since 1980.
However, the proportion of income attributable to government transfers has increased throughout the 1990s for the 30% of families at the bottom end of the income distribution. The proportion of their income derived from government transfers increased from 58.4% to 62.2%. Transfers to the other 70% decreased over the decade.
