William Watson: Let’s hear it for the 1%

Occupy and ye shall receive. It probably doesn’t work exactly like that but for whatever reason the federal Department of Finance has just published a new study on the progressivity of the federal income tax.

There was a time, in the 1970s, when federal budgets routinely contained analyses of how proposed measures would affect the distribution of income. But for the last three decades growth has been centre stage and redistribution off in the wings, if not out in the back alley. Now it’s working its way back to the front (albeit modestly: The Finance study is an appendix to the 2011 edition of the Department’s annual compilation of tax expenditures). Though the tents have gone away the obsession lingers on.

You wouldn’t expect a study of income distribution to smack of melodrama but in fact some of the statistical tables read almost like drugstore novels. But let me do a Coyne trick and return to that in a moment.


The study’s basic conclusion is that the income tax, which accounts for 55% of federal tax revenues, is indeed progressive. In total, 24 million Canadians filed income taxes in 2008, the most recent year for which data are available. Of those 24 million, only 14 million actually paid any net tax. Fully seven million received net cash from the tax system, while another three million neither received nor paid.

Understand that we’re not talking here about whether or not people “got money back at the end of the year” but whether after all withholding had been settled their incomes went up or down as a result of their encounter with the income tax system.

The 1% of tax-filers, the 240,000 or so who made $216,412 or more in 2008, saw their incomes fall almost 20% as a result of federal income taxes. At the minimum income for that bracket, 20% is $43,000, which ain’t beanbag. And most people in that bracket paid more. For their part the 2.1 million who made between $80,556 and $216,411 and therefore constituted the rest of the top 10% lost almost 15% of their income to the tax person.

At the other end of the distribution, the 4.8 million making less than $10,354 a year and constituting the bottom 20% of tax-filers saw their incomes rise by 22.3%.

The increase would have been substantially higher, though Finance Canada doesn’t say just how much higher, for the bottom 10% or 5% or 1%. In this bottom fifth the average tax rate was, as it were, -22.3%. (If you do have to be taxed, opt for negative taxes!) In the great majority of cases in this bracket people’s incomes rose because they were eligible for the refundable GST Credit, the Canada Child Tax Benefit (really a tax credit) or the Working Income Tax Benefit (likewise). Under these programs, taxpayers whose income is low enough get cheques from the federal government.

At first glance, it might seem outrageously unfair that “in a country as rich as Canada” fully 20% of tax-filers make less than $10,354 (while “Frank Stronach alone makes $62 million a year!”, as the chorus will go). But these are tax-filers. They’re not necessarily full-time workers. Rather, they’re anyone and everyone who made even a small amount of money, possibly from a part-time or summer job, and who saw fit to file, in many instances to take advantage of refundable tax credits. Some may even have made no money but filed for the credits. Many who did make money were likely the second, third or even higher-rank earner in their family. The data, like the authors of this study, treat all taxpayers as individuals.

The study also breaks things down by age and gender. This is where the drugstore novel comes in. Of the more than 1.4 million taxpayers who in 2008 gave up more than 15% of their income via the income tax system, 1.1 million were men. On the receiving end, of the more than two million Canadians who saw their income rise by more than 15% thanks to the income tax system 1.5 million were women. Moreover, it tends to be older rich men who are supporting younger women, many of them single women with children. Some of this flow of funds undoubtedly is between former spouses, though there’s no way of knowing exactly how much. The federal government doesn’t actually take sides in these domestic disputes but mechanically and anonymously moves money from top to bottom.

If you look at shares of income, the bottom eight deciles — i.e., the bottom 80% of taxpayers — saw their share of income rise as a result of the tax system. The top two deciles saw theirs decline. That doesn’t mean all eight bottom deciles actually gained because of the tax system — only the bottom four did — just that their incomes were cut proportionally less than those at the top so their share of the after-tax pie was larger.

Unless the recovery picks up speed and the unemployment rate starts dropping fast — which is not the majority forecast but isn’t actually out of the question for the next year or two — it looks like we’ll be spending more of our time talking about redistribution. When we do so, let’s not lose sight of the fact that we do a good deal of it already. And that’s just through the tax system, without considering the effects of free education, health care and more.

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