How Progressive is the Personal Income Tax System?

(Apologies if others have commented on this previously.)

The 2011 Tax Expenditures report by the federal Department of Finance includes an analysis of the progressivity of the federal personal income tax system.

What I find striking is just how weak the federal personal income tax is as a tool for shifting income from the affluent to the less affluent.

Table 8 shows that the top 20% of taxpayers  have 54.2% of pre tax income, and 50.6% of after tax income. Meanwhile, the bottom 40% have 9.7% of before tax income and 12.0% of after tax income. So, in and of itself there is not a lot of redistribution going on despite the fact that the effective tax rate does increase somewhat in line with rising income.

(Note that these calculations do not take into account the further impact of provincial income taxes. Also note that the redistributive impact of taxes and income transfers combined is much larger, since transfers paid for from taxes make up a much larger share of the income of the less affluent.)

In fairness, the top 1% – individuals earning more than $216,000 in 2008 – did face an effective federal tax rate of 20%, about double the average effective tax rate. Still, given that the progressive personal income tax is just one part of the overall tax system, there is good reason to pay more attention to tax fairness.

Andrew Jackson is Senior Policy Adviser with the Broadbent Institute and the Packer Professor of Social Justice at York University.


One comment

  1. Leaving income transfers aside for a moment, I wonder what the overall redistributive impact of taxes alone might be. I mean, transfers to people may be somewhat progressive (although apparently not very strongly), but I strongly suspect the GST ain’t. And I’m not certain about other things like property taxes, EI payments etc.

    Then there are user fees, which I’m not at all sure we even have a lot of figures on.

    Incidentally, whenever anyone complains about the GST on the basis that it’s regressive, I notice economists or economics-minded people will often come along and say that we might not like such taxes but they are good because they are “efficient”. They seem to mean something beyond administrative cost of collection by this, but I’ve never quite understood what–sometimes “efficient” in this context seems to mean “not distorting markets”. But wouldn’t that basically just translate to “not redistributive” and amount to a stealth argument that redistribution is by definition bad because it “distorts” market outcomes?

    . . . Moving even broader, I wonder what the redistributive impact of all transfers is, if one includes transfers to corporations and comes up with a plausible model of which actual persons’ pockets those transfers end up in?

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