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Revisiting Recent Trends in Canadian After-Tax Income Inequality Using Census Data

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  • Green, David A.
  • Milligan, Kevin
  • Frenette, Marc

Abstract

We present new evidence on levels and trends in after-tax income inequality in Canada between 1980 and 2000. We argue that existing data sources may miss changes in the tails of the income distribution, and that much of the changes in the income distribution have been in the tails. Our data are constructed from Census files, which are augmented with predicted taxes based on information available from administrative tax data. After validating our approach in predicting taxes on the Census files, we document differences in the levels and trends in after-tax inequality between the newly constructed data source and the more commonly used survey data. We find that after-tax inequality levels are substantially higher based on the new data, primarily because income levels are lower at the bottom than in survey data. The new data show larger long-term increases in after-tax income inequality and far more variability over the economic cycle. This raises interesting questions about the role of the tax and transfer system in mitigating both trends and fluctuations in market income inequality.

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Bibliographic Info

Paper provided by Statistics Canada, Analytical Studies Branch in its series Analytical Studies Branch Research Paper Series with number 2006274e.

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Date of creation: 27 Feb 2006
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Handle: RePEc:stc:stcp3e:2006274e

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Keywords: Household; family and personal income; Income; pensions; spending and wealth; Low income and inequality;

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References

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  1. Paul Beaudry & David A. Green, 2003. "Wages and Employment in the United States and Germany: What Explains the Differences?," American Economic Review, American Economic Association, vol. 93(3), pages 573-602, June.
  2. Fullerton, Don & Metcalf, Gilbert E., 2002. "Tax incidence," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 26, pages 1787-1872 Elsevier.
  3. Susan Johnson, 1995. "More Evidence on the Effect of Higher Unemployment on the Canadian Size Distribution of Income," Canadian Public Policy, University of Toronto Press, vol. 21(4), pages 423-428, December.
  4. Paul Beaudry & David Green, 1997. "Cohort Patterns in Canadian Earnings: Assessing the Role of Skill Premia in Inequality Trends," NBER Working Papers 6132, National Bureau of Economic Research, Inc.
  5. Picot, Garnett & Green, David A. & Frenette, Marc, 2004. "Rising Income Inequality in the 1990s: An Exploration of Three Data Sources," Analytical Studies Branch Research Paper Series 2004219e, Statistics Canada, Analytical Studies Branch.
  6. Murphy, Brian & Wolfson, Michael, 1998. "New Views on Inequality Trends in Canada and the United States," Analytical Studies Branch Research Paper Series 1998124e, Statistics Canada, Analytical Studies Branch.
  7. Daron Acemoglu, 2002. "Technical Change, Inequality, and the Labor Market," Journal of Economic Literature, American Economic Association, vol. 40(1), pages 7-72, March.
  8. Peter Gottschalk & Timothy M. Smeeding, 1997. "Cross-National Comparisons of Earnings and Income Inequality," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 633-687, June.
  9. Emmanuel Saez & Michael R. Veall, 2005. "The Evolution of High Incomes in Northern America: Lessons from Canadian Evidence," American Economic Review, American Economic Association, vol. 95(3), pages 831-849, June.
  10. Lars Osberg, 2003. "Long Run Trends in Income Inequality in the United States, UK, Sweden, Germany and Canada: A Birth Cohort View," Eastern Economic Journal, Eastern Economic Association, vol. 29(1), pages 121-141, Winter.
  11. Sen, Amartya, 2000. "Social justice and the distribution of income," Handbook of Income Distribution, in: A.B. Atkinson & F. Bourguignon (ed.), Handbook of Income Distribution, edition 1, volume 1, chapter 1, pages 59-85 Elsevier.
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Cited by:
  1. Frenette, Marc, 2007. "Why Are Youth from Lower-income Families Less Likely to Attend University? Evidence from Academic Abilities, Parental Influences, and Financial Constraints," Analytical Studies Branch Research Paper Series 2007295e, Statistics Canada, Analytical Studies Branch.
  2. Green, David A. & Riddell, W. Craig, 2012. "Ageing and Literacy Skills: Evidence from Canada, Norway and the United States," IZA Discussion Papers 6424, Institute for the Study of Labor (IZA).
  3. Heisz, Andrew, 2007. "Income Inequality and Redistribution in Canada: 1976 to 2004," Analytical Studies Branch Research Paper Series 2007298e, Statistics Canada, Analytical Studies Branch.
  4. Frenette, Marc, 2007. "Pourquoi les jeunes provenant de familles a plus faible revenu sont-ils moins susceptibles de frequenter l'universite? Analyse fondee sur les aptitudes aux etudes, l'influence des parents et les contr," Direction des etudes analytiques : documents de recherche 2007295f, Statistics Canada, Direction des etudes analytiques.

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