The Distributional Impact of the Federal Tax and Transfer Changes Introduced Since 1984

This article reports on the results of an analysis of the distributional impact in 1990 of the federal tax and transfer changes introduced by the Canadian government from the time of its election in 1984 through the announcement of its February 1990 budget. The analysis uses Statistics Canada's Social Policy Simulation Database and Model (SPSD/M). The analysis measures the distributional impact of the federal tax and transfer changes since 1984 by comparing the federal tax and transfer system that will actually be in place in 1990 with the system that would be in place if the 1984 tax and transfer legislation were still in effect, with full indexation through 1990 of exemptions, deductions, and rate brackets. The analysis fully reflects all of the federal tax and transfer changes introduced in the 1985, 1986, 1987, 1988, and 1989 budgets and in the 1988 tax reform. There were no significant tax or transfer changes in the February 1990 budget. The analysis indicates that in 1990 Canadian households will pay a total of about $11.1 billion more in federal taxes net of transfers than they would pay if the 1984 tax system were still in effect. Increases in net federal income tax account for only $0.9 billion of this total. Federal surtaxes, which account for $3.2 billion, and increases in federal commodity taxes, which account for $6.1 billion, are by far the most important contributors to the increasing net tax burden of the personal sector. The additional net tax burden borne by an average Canadian family in 1990 will be about $1,000. Of the 11.1 million census families in Canada, 9.5 million (85 percent) will face higher federal taxes net of transfer than they would face under an extension of the 1984 tax system. Only 1.5 million (13 percent) will face lower federal taxes net of transfers. The tax and transfer changes introduced are very progressive in the aggregate for families that earn less than $35,000 per year and roughly proportional for families that earn between $35,000 and $75,000. The tax changes become moderately regressive in the $75,000 to $1 50,000 range and severely regressive over $150,000. It is clear that middle-income families, particularly those with children, have borne the brunt of the recent tax increases. Families in the highest income categories have received a less than proportionate share of the increased tax burden, and families with children in the lowest income categories have actually enjoyed tax cuts as a result of the tax and transfer changes introduced since 1984. Given the size of the federal deficit, further tax increases are inevitable, and the distribution of the growing tax burden must be equitable. Distributional analysis performed with the SPSD/M, of the kind presented in this article, can help to ensure that the public is aware of the distributional impact of proposed tax changes.