The Context of “Flat Tax” in Canada - 2008

Lars OsbergEconomics Department Dalhousie UniversityACEA – October 24, 2008

30 years of no Growth – for most!

1976

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1981

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Real Family Incomes in Canada 1976-2006 20th, 40th, 60th & 80th Percentiles ($2006)

CANSIM v25731821 - v25731824

20th %ile40th %ile60th %ile80th %ile

Income Trajectories of High Income Canadians 1982-2005 Murphy, Michaud &Wolfson Statistics Canada IARIW 30th General ConferencePortoroz, Slovenia, August 24-30, 2008

“growth is largely limited to the top 5% which in turn has been driven largely by increases to the incomes of the top 1%”

“marginal increase in the stability of the high income population”

No Evidence for: “Greater Returns for Greater Risk” Ho

Absolute Change in Income Shares for Various Total Income Quantiles Between 1982 and 2005

0.1% 0.2%

-0.3% -0.5%-0.7%

-0.9% -1.1% -1.2%-1.5%

-1.8%-2.2%

6.5%6.5%

1.1%

5.5%

2.5%2.9%

1.8%

1.2%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

1 2 3 4 5 6 7 8 9 10

11

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20 All

Tri

mm

ed

All

Tri

mm

ed

All

Tri

mm

ed

To

p .

01

Vingtiles Top5

Top1

Top.1

Top.01

Total Income Quantile Group

Ab

so

lute

Ch

an

ge

in

In

co

me

Sh

are

Source: Statistics Canada, Special Tabulations from the LAD.

Brian Murphy, Paul Roberts and Michael Wolfson (2007) “High-income Canadians” Perspectives on Labour and Income – September 2007 Pages 5 to 17 Statistics Canada Cat No. 75-001-XIE

Brian Murphy, Paul Roberts and Michael Wolfson (2007) “High-income Canadians” Perspectives on Labour and Income – September 2007 Pages 5 to 17 Statistics Canada Cat No. 75-001-XIE

Rising share of top 5%- a post 1995 issue ?THE EVOLUTION OF HIGH INCOMES IN CANADA, 1920-2000 Emmanuel Saez Michael R. VeallWorking Paper 9607 http://www.nber.org/papers/w9607

Only the top 1% has increase in income share in Canada !THE EVOLUTION OF HIGH INCOMES IN CANADA, 1920-2000 Emmanuel Saez Michael R. VeallWorking Paper 9607 http://www.nber.org/papers/w9607

Marginal Income Tax Rates in Canada: 1920-2000Top Incomes Over the 20th Century: A Contrast Between Continental European and English-Speaking Countries by A.B. Atkinson and T. Piketty Oxford University Press, 2007,

Canada: “both inequality and poverty rates have increased rapidly in the past 10 years, now reaching levels above the OECD average. “OECD (2008), Growing Unequal? : Income Distribution and Poverty in OECD Countries October 2008

Total Tax Rate in Canada – “Flat” & declining

Lee, Marc (2007) Eroding Tax Fairness: Tax Incidence in Canada, 1990 to 2005 Canadian Centre for Policy Alternatives, Toronto November 2007

Income & CorporateTax – only progressive elements in tax system

Tax cuts greatest at top Income tax crucial to progressivity of system

Fundamental change in tax structure◦ Would remove sole progressive element in tax system◦ Total tax burden then becomes regressive◦ “Middle 90%” – no increase in income for 30 years

Recessionary losses loom in 2008-2011

Dramatic income rise of top percentile imply major personal gains from “flat tax”◦ Corresponding losses imposed on poorer neighbours

Politics in the coming recession – rhetoric of “flat tax” rings hollow

“Flat Tax” – “them that has, keeps”

Changes in real income- far larger in top percentiles Brian Murphy, Paul Roberts and Michael Wolfson (2007) “High-income Canadians” Perspectives on Labour and Income – September 2007 Pages 5 to 17 Statistics Canada Cat No. 75-001-XIE

Percentage Change in Real Income 1982 to 2004

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

20%to

25%

25%to

30%

30%to

35%

35%to

40%

40%to

45%

45%to

50%

50%to

55%

55%to

60%

60%to

65%

65%to

70%

70%to

75%

75%to

80%

80%to

85%

85%to

90%

90%to

95%

95 to99%

top 1%

Individual % change

Family % change

Income Tax data show increase in income share of top 1% of families of 3.4 percentage points in twelve years 1992-2004 – a very large change in historical context !

Brian Murphy, Paul Roberts and Michael Wolfson (2007) “High-income Canadians” Perspectives on Labour and Income – September 2007 Pages 5 to 17 Statistics Canada Cat No. 75-001-XIE

Statistics Canada (1998) Income Distribution by Size in Canada Catalogue No. 13-207.

CANSIM Table 202-0701V1546461 to V1546465 J.R. Podoluk (1968)Incomes of Canadians, Dominion

Bureau of Statistics.

The BIG NEWS in Canada & USA – sharply rising income share at very topTHE EVOLUTION OF HIGH INCOMES IN CANADA, 1920-2000 Emmanuel Saez Michael R. VeallWorking Paper 9607 http://www.nber.org/papers/w9607

Lessons from Canadian Income Tax data

THE EVOLUTION OF HIGH INCOMES IN CANADA, 1920-2000 Emmanuel Saez Michael R. Veall Pp. 226-227 in A.B.Atkinson and T. Piketty Top Incomes in the 20th Century Oxford University Press 2007

Canada, UK, US, France – top income shares fell sharply during WWII & stayed down for 30 years

1980-2000: sharp increase in top end shares ◦ Concentrated in top 1% & even larger for top 0.1%

Not driven by tax law changes - no coincidence in trends But big decline in top marginal rates

Similar trends for individual & family income Not result of greater spousal income correlation

Income mobility – same or decrease since 1980 Same concentration trend in 3 & 5 year average income Probability still in top 0.1% approx same 1982-2000

Labour income increase greatest in top 1% - Less among Francophone Quebecers Lags US increase in top CEO compensation

◦ WHY? Skill biased tech change cannot explain concentration of income

gains Emigration option to USA & ‘Brain Drain’ – the ‘threat effect’ &

keeping up with US CEO salaries

Real Income in Canada by Quintile1980 - 2005

CANSIM v21188957-v21188962 ; After-tax income; Adjusted average (2005 Dollars)

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1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

2005

$

Average

bottom 20%

quintile 2

quintile 3

quintile 4

top 20%