The Redistribution of Income in Canada 9780773595620

Table of contents :
Cover
Title
Copyright
Contents
Preface
I. The Redistribution of Income in Canada: Introduction
II. The Framework: Fiscal Incidence in an Open Economy
Introduction
The methodological framework
The income concept
Conclusions
III. Tax Incidence: The Effect of Taxes on the Distribution of Income
Selection of taxes
The shifting assumptions
Empirical results
Conclusions
IV. The Incidence of Public Expenditures: The Effect of Government Expenditures on the Distribution of Income
Introduction
Selection of public expenditures
The distributional implications of public expenditures
Empirical results
Conclusions
V. Fiscal Incidence: The Redistribution of Income in Canada, 1969
Difficulties of methodology and interpretation
Empirical results
Conclusions
VI. The Redistribution of Income in Canada, 1961-1976
Introduction
Income redistribution in Canada, 1961
The change in income redistribution in Canada, 1961-1969
Income redistribution in Canada, 1969-1976
Conclusions
VII. Summary and Conclusions
Notes
List of Tables and Charts

Citation preview

/

The Redistribution of Income in Canada/ W. IRWI N GILL ESPIE

-:;:;.

CARLETON UNIVERSITY The Carleton Library A se ri es of reprints. original wo rk s. a nd new coll ectio ns of so urce ma teri al relatin g to Canada. issued und er the editoria l supe rvi sion o f

th e Institute of Canadian Studies of Carl eton Un iversity, Ottawa. Director of the Institute and General Editor

S. F. Wise Editorial Board Marilyn J. Ba rber ( Hisl ory ) Dennis Forcese (S ociology) David B. Knight (Geography ) Steven La ngd on (Economics) Mauree n Mo la l (Political Science) Marga ret Ogil vie (Law) Jacques Cheva li er (A llfhropology) Publications Editor Jam es H. Marsh

H I E CARLETON LIB RA RY NO. 124

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TOTAL FEDERAL TAX!'::;

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,,' "Supporting Documents" .

Part A. Table

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. Expt!rime nts I. 2. an d 3 invo lve the edu ca tio n expe nd iture adj ustment. T he sta nd ard C ine ff iciency component (received by profit earners) ii)

All growth and stability benefits to trainees All ~rowth and stability benefits (75%) to general benefits (B) i} growth and stability gains ; 60% 30% to trainees 30% to general benefits (B) ii) equity gains : 20% to trainees 11i) regional balance : 2a,i to gene ral benefits (B) i) efficient share : 50% by the standard case ii) inefficient share : sO,l'; to bureau members (all ocated by wages and salaries)

Gene ral Expenditure Adjustment

17

Source:

Expe r iment 17

Aa r on and McGui r e Methodology (see te xt for discussion of technique)

Text discussion of Part IV . The general expenditure Assumptions A and B refer to the first two cases where general expenditures are allocated proportional to all family units and broad income , respectively.

Table

~

.6

Total Expendit.u re I n ci denc e f o r Alte r nll.ti ve ""- ndlt.u r e Shirt.in Usi ns t.he Br oad Income Conce pt . Canada , 19 9

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The Inddence 0/ Public Expemliwres

121

that it would be worthwhile to devote future efforts to improving the qua lity o f th e da ta base for hospital use rs. Experiment 5 involves the social sec urity expenditu re adjustment. The standard case ass umes that transfer payments connec ted with the social insuran ce legis lation (unemployme nt insuran ce benefits and the Canada and Quebec pension pla ns paymen ts) acc rue directl y to and are incurred on beha lf of th e recipients of such payme nts. When it is assumed that all such payments arc incurred on bchalf of prudent humanitarians and allocated by our proxy se ri es for prudent huma nitarians, the ge nera l pattern of total public expenditu re incidence does no t change drastically. but the large change in the effective rates ove r th e first three inco me brackets and the last two income brackets is suffi cie nt to resu lt in a m uch less reg ressive pa tt ern . In ot her words. the expenditure system becomes considerably less favourab le to th e lowe r income brackets if social insurance schemes a re incurred mainly on behalf of fami ly units who wish 10 minimize th e cos t to themselves of providing certain forms of humanitarian socia l welfare to ot her family units who are less we ll off. In addi tio n. the rela tive improvement of the expe nditure position of th e fa mil y units in the $ 15.000and-over in come class (compared with the standard case) is sign ifica nt, although not so spectacular as the cha nge ove r the very lowest inco me classes. I IS This experime nt results in the grea tes t change of effec ti ve ra tes and general pattern of ex penditure in cid ence o f any o f the 17 experim en ts. It underlines the importance of future development along the lin es suggested by ou r ea rlier discussion. It is now more important th an ever that future theoretical and empi rica l wo rk address itself to the questions: to what exte nt can transfe r payments (at least of the social insurance type) co nti nue to be treated similarly to negati ve taxes in their distributive impact? and to what extent sho uld they be analysed more like public expe nditures on goods and se rvices. some part of which is incurred o n behalf of groups o th er than th ose receiving the transfers? Expe ri ment 5 also emphasizes the ro le pl ayed by an accurate proxy for the gro up of family units referred to throu ghou t as prud ent hum anit arians. I 19 F inally, Experiment 5 suggests th at ex trem e caution should be used in interp retin g th e fin al re sults of the sta nd ard case as being hard. tinal resu lts: those resu lts a rc o nly valid fo r one set of plausible hypotheses-na mely, the standard case. Th e alternative hypotheses for social insurance legislation. which some may also find plausible. alters the resu lts considerably. Experime nts 6 thro ugh 12 in vo lve the reg ional economic expansion adjust ment. The standard case assumes th at such expenditures are

122

T H E RED I STRIIWT I ON OF I NCOME IN CANADA

incurred o n be ha lf of all fa mi ly un its, consume rs, urba n fam ily units. a nd labo ur in the laggin g regio ns: moreover, it is o nly 50 pe r ce n t

effecti ve: th e re main der goes to a ugment profi ts. The ge nera l pa ttern of to tal public ex pe ndi ture incidence a nd the magnitudes of the ra les a re not altered by th e ma ny a lte rn ative expe rime nlS. Give n the sma ll share of such ex pendi tures in th e to tal pa tte rn , thi s m ight be a nticipated. Ho weve r, g rowth in thi s ex pe nditure ca tegory, a t anyth in g lik e past g row th ra lcs, cou ld be e xpec ted 10 ha ve a mo re signi fi cant fect. 120 Experime nts 13 thro ugh 16 in volve the m a npowe r expe nditure ad j ustm ent. T he sta nd a rd case assumes th a t such ex pe nditures a re incurred on behalf of tra in ees a nd th e ge'ne ra l public thro ugh growth and sta bility ga in s an d regio na l ba la nce gains. The ge ne ra l pattern of tota l public ex pe ndi ture incidence is no t a lte red by th e seve ra l a lte rna tive expe ri me nts, and th e slight cha nge in absolute m agnitudes ove r the very lowest income class is no t eno ugh to inOu ence th e degree o f regressiv ity ove r this ra nge. In sho rt, th e gene ral pa ttern is fa irly in se nsitive to diffe re nt hy po th eses e m ployed in th e ma npowe r sectio n. Expe rim ent 17 in volves the ge nera l expe nditure adj ustm e nt , e mploying the Aaro n and McGu ire met hodology d iscussed ea rlier. And, while I have reserva tio ns about the me th od o logy, neve rthe less the reader shou ld be awa re of th e empirical resu lts, g ive n th a t met hod o logy. This is crucia l for two reaso ns: fi rst, the Aa ron and McG ui re me thodo logy is o ne of two m aj or critica l cha ll e nges to the me th od o logy o f fisca l incid e nce studies, a nd as such it m erits co nside rat io n : second. the use of the Aaron a nd McGu ire me thodo logy fo r the trea tment of pu re pu blic goods has led some observers. including Aaron a nd McG ui re, to infer that the empi ri ca l resu lts are alte red so significant ly tha t th ey may not or do no t sugges t redist ri butio n fro m the highe r in com e classes to the lowe r inco m e c1asses. 121 Expe rim ent 17 dem o nstra tes tha t such a n in fe re nce fo r th e Ca nadi a n eco no my as described by this inves tiga ti on wo uld be wide of th e ma rk . I II Th e Aa ro n a nd McG uire m etho do logy a ll ocates re la tive ly mo re of th e va lu e of " ge nera l" expe nd itures to the lo west inco me class, rela ti ve ly less to the m idd le inco me classes, an d re latively mo re to th e hig her in co me brack et. l 21 T hu s. the overa ll e ffec t is slig ht a nd the ge nera l pattern is no t a ffected . Wha teve r the th eore tica l a d va ntages of emp loying th e Aaron a nd McG uire me th od o logy for pure pu blic goods, the n, th e qu a ntita tive effect is mino r an d does no t el imin a te the measured redi stributi o n from uppe r incom e classes to the lowe r inco me cl asses. Let us now turn to a mo re de ta iled ex'lmin a ti o n of the o rth od ox

cr-

The II/cidence of Public £xpelldiwres

123

general expenditure assumptio ns. Table 4.9 presen ts the total expenditure patte rn , for each leve l of government, at th e all-Ca nada le ve l of

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..orno ....... 0.",.O, and mildly regress ive beyond . Howe ve r, the progression a nd regression is so mild that one ca n treat it as no t significantly d ifferen t from a pro portio nal pattern . One ca n co nclud e that, exce pt for the two ex tremes of th e in come sca le then. there is vi rtually no redistributi on a t the local level: most family units are ga in ers and ro ughly to th e sa me degree. On ly the ve ry lowest income classes arc net contri buto rs to the redistributive mechanism at the local leve l. In summary. the sta nd a rd pa ttern of fiscal in cidence at the all Ca nada leve l for th e to tal publi c sector is o ne of con tin uous redistribution from higher to lowe r in co me classes. Thi s pattern is th e result of: a fed e ral redistribution th a t is highly redistributi ve ove r the lowe r in come classes, but rel a tively less so ove r the hi ghest in co me classes: a provinci al red istribution th a t is highly redistributive ove r th e lower and middl e income classes and co ntinu es ove r the ve ry highest in come classes; and a local pattern th a t redistri butes away from th e ve ry lowest in come class in favo ur o f midd le and higher income fami li es roughly to the same de gree. The empirica l resu lts fo r the standa rd pattern o f fi sca l incid e nce, given the sha re method o f ca lcul ati on, are derived by co mpa ring, for the distribution of family units in Ca nada, the di stributio n o f broad income, and th e distribu tion o f adjusted broad in come. The comparison is fou nd in Table 5.3 a nd C ha rt 5.2. Th e la st co lumn of th e table

139

Fiscal Incidence Table 5.3 Fiscal Incidence , Using the Share Neasu,'c Cana da , 1969 (Percentage Distribution) Family Unl ts

Family 110ney Income Class

( 1)

,

$

Under 2 , 000 2 , 000 2 , 999 3 , 000 3 , 999 11 , 000 11 , 999 5 , 000 5 , 999 6 , 000 6 , 999 7,000 9 , 999 10 , 000 111 , 999 15 , 000 and over Total

Source :

100

Broad Income

O}

(2)

0.9 1.6

12 . ]

6.0 7. 6 .6 6.0 7· 9

Adjusted Broad Income

Fiscal Incidence (3) - (2) (' )

2. 7

+1.

3. ,

a

3.1

U

!1. 2

5.5 6.5

5. 1 6 .1 6. 6

22 . 0 18 . 2

23 . 11 27 · 3

22 . 8 25 · 3

+1 . 6 +1. 3 +0 .9 +0 . 6 +0 . - 0.6 -2 0

~ 100 . 0

..11..:.1

..1l.:.!!.

...oil

100 . 0

100 . 0

0

"Supporting Documents" , Part A, Table 4{g) and Part D, Tables 1 and 7 .

o

20

40

60

Family Units, 1969 (%1

80

60

£ E 40 8 • 20

Chart 5 , 2

Fi scal Incidence , 1969 , Using the Lorenz Measure of Fiscal Incidence , Canada , 1969

140

THE REDISTRIBUTION OF INCOME I N CANADA

is the change in share of to tal income that results due to the tax and expenditure policics of th e governm ents in Ca nada. The sha re measu re of fi sca l in cid ence indicates th at the red istributive mechanism of the public sec tor increased th e share of in come fo r family uni ts in income classes up to $6,999. For example, the poorest 12 .3 per cent of famil y uni ts experienced an in cre ased share of total Canadian in come of 1.8 per cent, endi ng up with 2.7 per ce nt of tota l in come. Likewise, th e share of income increased - altho ugh by decreasin g amou nts- fo r each higher income class up to the $6,000-$6,999 in come class. The redistributive mech anism decreased the share of income fo r fami ly units in the income classes beyond $7,000, to the point where family uni ts in the highest measured incom e class experienced a share reduc· lion of 3.9 per cent. Put a nothe r way, th e riches t 8.3 pe r cent o f famil y units expe ri enced a decreased share of to tal in come of 3.9 pe r cent, ending up with 23.4 per cent of total in come.

The Standard Pattern of Fiscal Incidence, Regional Results This sectio n re turns to th e effec tive ra tes measure of fisca l in cidence. Table 5.4 and Cha rt 5.3 prese nt the res ults for the standard case for the five regions of Ca nada based on the unadjusted estim a tes of Part A of the "S upporting Documents". These regional resul ts are much more tentative and prelimina ry than the redistribution of income measures a t the all·Ca nada leve l. In part thi s is beca use th e errors of estim ation for the raw data that underlie th e di stributive se ri es o n co nsumer expenditure a nd factor outlay are expected to be grea ter a t th e fine r, regional level of disaggregation. In add ition, the regional resu lts have not been adjusted fo r the differences in definitio ns of th e family unit, as have th e all·Canada results in "Suppo rting Documents", Part D.IO While the adju ~ t ment p rocess does no t a ffe ct th e ge neral pattern of fiscal incid ence a t the all·Canada level, it docs marginally affect the magnitud es of the fiscal incidence ra tes. I I Conseque ntly, in th e foll ow. ing discussion we focus on th e general pattern of fiscal in cidence at the regional level and note fiscal incidence rates only when the diffe rences are sufficie ntly la rge to warran t a strong inference. The five regional patterns o f tota l fisca l incid ence are in ge nera l similar to the pattern at the all· Canada leve l (lin es 19-24). Over th e lower and middle in come classes, fisca l incid ence is posi tive and regressive in all fi ve regions, wi th the rel a ti ve degree of redistri bution being greatest in Quebec a nd least in the Prairies. Fam ily uni ts with low incomes ga in from th e red istri butive mechanism o f the public secto r in Ca nada , regardl ess o f th e reg ion in which th ey live . Ove r th e

Tab l e 5 . 4 FI 4C"l In c I dc"c" , All Lev"ls or Go ... erno;e"t l

U S! " !!i

t he Br oad Y"c Otr.e Co" cel!t !

Cl!.ml ~"

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i'e r c ent4 gel

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,,, ..,

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17

18

19

"21 ""'"

l t e= Fed eral Fl lc s l Incidence Atla nti c Reg i on Quebe c On t4r i o Prsirie Regi on 8r Ithh Colum bia Canida

Facilv ...one ... Yn co..e ClIIs s $2 , 000 $} , OOO Under $2 , 000 · } , 999 · 2 . 999

16 1. 2 1, 6 , 7

6}. 6

16 . 4 16 .5 12 . 7 20 . 4

}0 . 2

l Zj

~J t~ : 3

15 . 8

5tt }5 . 7

ProvInci a l fhcal r " c I de"ce Atlantic Re gton Quebe c On tar i o Pr a iri e Re gi e" I!ri thh Co l ue:b ll1 Ca na da

57 .J1 111. 5 14 . 1 40 . 0

Local Fisc al In c i den ce At lan t i c Re gI on Que be c On tar i o Prai r ie Reg i on BrIt tlh co l u",b i a Canid a

- 5.} _ 2 .1

To tal H3C a l In c i de nce Athntl c Re gI on Qu e bec On tar i o Prairi e Reg i o n Bf l t1 4h Co lu mb ia

~~6 : G

cana ~ D.

14 1.1

nJ

L7 L, 1. 7 1. 7 220 . 2

1}9 . } 2} 5 . } 21, . 2

In . 6 2

}6 . 0 58 .11 22 . 2 1}. 5 }1 . 5 }1.1

,.' 10 . 6

L, L6

, .6

,., '" ,.,

6., 2. 1

6., L7

,...

,,-,... ,., L,

,.,

~. o

' .1 ' .8 ,., ,.,

." '}.r .1

22 . 1 24 . 7

15 .1

7.2

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51 . }

1} 1.1

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56 .8 5} . 7

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2'; . 6 }1 . 8 11 . } }0 .9

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To t4 1

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6.,

8., ,., 11 . 7

' .8 ' .8

7.7

U i

- .0 . 11

7. "

: /:l ,., /.,., L, L,

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L8 L,

'"

6.8

_ l~ . O

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6.1

- 1~,.,: 2 ' .8

" For the 9t llnd!lrd c a s e ' !lo t e : So urc e:

Det!l lls IllIIY not ILdd t o t ots.l s , due t o r ounding . " Suppor t ing DocUl'lents" . Part A, Tabl e 19 .

:;;:

142

THE RED ISTR I BUTI ON OF I NCOME I N CANADA

upper income classes th e pattern of fisca l incidence fo r Ontario is

similar to the national pattern . However, for the Atlantic region and British Columbia fiscal incide nce over th e upper. in come classes tapers ofT and beco mes proportional, for th e Prairi es it beco mes virtually proporti onal, and fo r Quebec it may possibly become progressive. Given the difficulties allud ed to above , the co nclusion abo ut Quebec could not be morc definitive th an to suggest that its fisca l incidence becomes proporti onal for the rich. Family units with high in comes contribute to the redistributive mechanism o f th e public sector in all regions except the Atlantic provinces but, exce pt for Ontario, they contribute at the sa me rate as do families with incomes of $ 10,000 to

$14,999.

•

300

12 16 20 24 28 BIGId Income in ThlJuSinds IJI DIJII.IIrS, 1969

12

J6

240

~ 180

-- - - -- - --••••••• -•••••

~ .~

120

~

ATLANTIC REGION QUEBEC ONTAR IO PRAIR IE PROVINCES BRITISH COLUMBIA

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Chart 5 . 3

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The RedislrihllfiOll o/ Income. 1961-1976

155

th e broad in co me conce pt and the ass umpti ons o f th e stand ard case. More detail ed in fo rm ation a bout separate taxes and expenditures is fo und in " Supporting Docum ents", Part C.) To tal tax in cidence in 196 1 was regress ive 4 up 10 an income leve l of about $5,000 and progressive beyond. This genera l pattern of lotal tax incidence was not ve ry different when measured against th e adjusted broad inco me base, alth ough th e regressivity over the lowe r in come brackets only extended up to an in come leve l of $3,000. ~ Total expend itu re in ci dence in 196 1 was regress ive throughou t th e measured in come sca le; th at is, expe nditure incid ence was rela ti ve ly more favourable to famil y units in th e lower income classes than to fa mily uni ts in the middle and uppe r inco me classes. This ge neral pa ttern of expend iture in cidence was not significa ntly altered when measured aga inst th e adjusted broad income base, alth ough th e actual magnitudes did vary over th e lower in come bracke ts. 6 Th e ge neral pattern also did not vary signi fica ntly when ge nera l expend itures we re ass umed to be alloca ted propo rtionally to all fa mily un its (Assumpti on A) o r disposable income (Assumpti on D). Th e pattern on ly d ive rged from the stand ard case ove r the upper income brackets whe n general expenditures were ass um ed to be all oca ted proportiona lly to capital income, in which case expend iture incid ence became p rogressive in th e S IO.OOO-and-o ver incom e c1asses. 7 Th e total public secto r was con ti n uously red istribu ti ve in 1961 (lines 9 through 12). Family uni ts with in co mes up to $7,000 were net ga iners from th e redistributi ve mechanism; those with th e ve ry lowes t incomes were ga iners to a re lative ly large r degree than th ose with higher incomes. Family units with incomes of $7.000 to $9.999 broke eve n; fam ily un its with inco mes of $ 10.000 and over we re net co ntributors to the redistributi ve mechanism. This to tal redi stributi ve pa ttern was made up of the foll owing:8 I. a federal redi stri buti ve mec hani sm that was co ntinuously redistributive, generating a brea k-eve n inco me towards th e upper end of th e $5,000·$6,999 in come class; 2. a provin cial redistributi ve mechani sm tha t was continuo usly redistributive, ge nerating a break-e ven incomc in the $7,000-$9,999 income class; and 3. a local fi sca l incidence pattern th at was progressive over the lowest in come brackc ts and mild ly regressive beyond. gene ra tin g a brea keven income in th e $ 1O,OOO-a nd-over income class. Next. th e degree of redistri b utio n with th e share measure o f fiscal incidence is provid ed in Table 6.2. Th e difference between th e share of adjusted broad income and the share o f broad in come tha t a give n

156

HIE REDISTRIBUTION OF I NCOME I N CANADA

Tabl e 6 . 2 Fiscal I ncidence Using the Share Measure . Canada, 1961 (Percentage Distr ibutions)

DistributIon of Income Fa!Dlly I-!oney

FaC!ily

Income Class

Unitll

Br oad Incol:Ie

Adjusted

Broad

Income

( 1)

(2)

Fiscal

Incidence

0)

- (21

(lq

(3)

21. 7

3.1

5. B

+ 2 .7

$ 2,000 - 2 , 999

12.1

6 .0

7.7

+ 1. 7

3 . 000 - 3,999

13. 4

9 .B

10 .7

+ 0·9

h , OOO - 11 , 999

111 . 8

14 . 11

14 . 8

+ 0.4

5 . 000 - 6 , 999

21.4

26 . 8

26 .1

- 0. 7

7,000 - 9.999

11.5

20 . 5

18 .8

- 1. 7

~

19 . 1I

16 . 1

-u

100 . 0

100 . 0

100 . 0

0 .0

Under $2,000

10,000 and over Total

Note: Source:

Details may not add to totals , due to rounding . " Supporting Documents" , Part. C, Table 1.

number of fam ily units experie nced in 196 1 is the share measure of fiscal incidence (column 4). The share measure indica tes th at the public sector was con tinuously redistributive from high income gro ups to low income groups in 196 1: a concl usion consistent with the results for the rates measure of fiscal incidence. Family units with incomes of less than _$5,OOO are gainers from th e redistributive mechanism of the public sector (their share of real in come increases) and fami ly units ' wi th in comes of greater than $5.000 are net contributors to the redistributive mecha nism (their share of re al in co me dec reases). T his pattern of redistribution of income is presented in Chart 6. 1.

THE C HA NGE I N I NCOME REDISTRIBUTION I N CANADA, 1961 · 1969

Th is section compares the empirical est imates of fisca l incidence for 196 1 and 1969 in o rder to cast some light on the nature of th e change

The Redistribution of Income, 1961· 1976

100

a

20

40

157

60 1961 1%1

Famil v Units,

80

/ 100

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71,e Redistribution

0/ In come. 1961·1976

159

in cidence rate of family units with inco mes exceedi ng S20.(X){) fell, thereby res ultin g in an improvemen t in in co me due to the redistributi ve mechanism of the public sec to r durin g the I960s. It seems clear that low in come famil y units gained, middle to upper-middle in come family units lost. and high in come family units gained from changes in redi stributi ve act ivilY between 1961 and 1969. This study has measured fisca l incidence (IS a chan ge in redi stributed income rellllive 10 the origina l in come of each represe ntative famil y unit. It is worthwhile to consider the actual amounts of redist ri buted income (either ga ined or contributed) fo r each income class. The "average" fi sca l incid ence amo unts arc found in columns (3) and (7) o f Table 6.3.'0 Several obse rvat io ns can be made. First, the largest fi sca l amount is not received by the ve ry poorest famil y units, in either 196 1 or 1969. Second , by 1969, an average fa mily unit in the fourth in come class with a broad income of $4.054 was receiving a fisca l amount as large as an average famil y un it with a broad income of S564. Third, given the distribution of famil y units. during the 19605 th e pattern o f income redistribution changed in favour o f lo w income and rich family units at th e expense o f upper-middle inco me family units. r-.--,--.--'--r--'--r--'~r--,-'

200

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120

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Fi scal Incidence , 1961 and 1969 : Ef f ective Fiscal I ncidence Rates for All Levels of Gover nrr.ent , Expr essed f or the Average Br oad Income Per Family Unit , By I n co~e Class ( in Constant 1961 Dollars) , Canada , 1961 and 1969

160

The Lorenz Measure

THE REDI STRIB UTIO N OF INCOME I N C ANADA

0/ Fiscallllddellce,

/96/-1969

Given the inflation of money income between 1961 and 1969, the money income brackets used to group family units in the two years will not be directly comparable, and the effective rates measure of fiscal incidence will be less meaningful for describing changes through time than it is for describing the state of redistribution at onc point of lime. Accordingly, we have recast our results in a Lorenz measure of

fiscal incidence where, for a given percentage distribution of fa mily units in each year, the percentage of income redistributed is compared. 11 The results are provided in Table 6.4. The Lorenz gro upi ng of family uni ts (column 2) is neither of quinliles nor quartiles, emerging as it does from the data co nst rai nts inh erent in th e fiscal incidence sludies for 196 1 and 1969. The 1969 distribution of family units has been adjusted to be rendered consistent with th e 1961 distribution. 12 The Lorenz groups are also designated by characterized income classes, with the median family unit falling within th e middle income cl ass. Th e Lorenz measure o f redistri bu ted in come during 196 1 is contained in colu mn 3 for the Panel A results. Lorenz groups 1 and 2 gained from the redistributive process of the public sector, groups 4 and 5 were con tributo rs to the redistributive process, and the median group was a very slight gainer. In other word s, the p ubli c sector in 1961 d id redistribute income from the upper-middle and highest income classes to th e lowest and lower-middle income classes: th e lowest income cl ass was a net gain er of 2.7 per cent o f to tal income , while the highest income cl ass was a net co ntributor by 3.3 per ce nt o f total income. For the Panel A results th e share o f to tal income gained or contributed by each Loren z group is shared by all fami ly units within tha t group. The Lorenz measure of redistributed income for 1969 (column 4) demonstrates that the public sector in 1969 did redistribute income from the upper-middle a nd highest in come classes to the lowest and lower-middle income classes (consistent with the findings o f Table 6.3). Colum n 5 is especially important since it captures th e change ove r time in the redistributive act ivity of th e public sector. It indicates that the degree o f redistributive activity changed during the 1960s; that cha nge favo ured groups I, 2, and 5 at the expense of groups 3 and 4.1) The total public sector has become more redi stributive over time , but it is redi stribution away from the middle and upper-middle in come cl asses to the ex tremes of the income sca lc - both th e lowest in come classes and th e highest in come class.

161

The RedislribUlion of In come, 196 1· 1976 Table 6 . ~ Income Redistributio n in Canada , 1961- 1969 . Using the Lorenz Measure of Fiscal Incidence

Uno

Family Fiscal Incidence Lorenz Units in (% of Gr ouping Total Income (Inc ome class) Lore nz Red i stri buted) Gr oup 1961 1969 (1) (2) (3) (")

Change in Fiscal Incidence 1961 - 1969

(5)

Panel A: Share of Total Income Redist rib uted for Each Lorenz Group Group One (poorest)

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w. Irwl.n G1l1npie . "Ef re ct s of Federal Budge tary Polides During t he 1910s on t he Dis tri bution of Incoille in Cano.da ," lIIimeo . (Ot tawa , 1917) . 1. The distr i butio ns o f famil y uni t s a nd income are for 1 969 ; for deta il s of in s trwne nt a o f budget o ry polic i es , s e e "Suppor t ing OocUll'lcn t o". Port C, Table 13 . 2 . The i ncoille bose is adjusted brond ineome . 3. TIlo out of rive i nstrUll'lcnts o nly hod been legislated pr io r t o Oe t ober 30 , 1972 elec t ion (Libe ral mi nori ty gov e r Mlent) . 4 . Budget and pont - budget l egislation ine1uded t hree i nst I"UI:ents from May 1972 Budge t. Budget defeat. i n the lIo us e led t o July 6 , 1914 election (Liberal maj o rity goverlU:lent). 6 . Budget ine1uded in strument s of May Budget .

,.

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-!

2. 2 6. ,

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21

t6,ooo.

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0.6 1. 5 6. , 2. 1

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(")

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"

The RedislribufiOfl of /"come, 1961·1976

167

policy during the 1970s red uced the share of command ove r reso urces of the poorest Canad ians while it in creased the share of comma nd over reso urces of the richest Canadia ns. Federal budgetary policies, with the so le exception of the 1972 budget, did not provide larger effective benefit ra tes (when expressed as a pe rcen tage of income) fo r the poor than for th e rich. The reverse was true, as the emp irica l esti mates of Pa nel B de monstra te. The o ne excep tio n, the May 1972 budge t, is especially importan t fo r the nat ure of the budgetary policies that were so favourab le to the poorest fami ly units: an increase in the old age secu rity pension and the Guaranteed Income Supplement for the elderly, th ereafter indexed for c ha nges in the consumer p rice in dex. 19 The pe nsion (because it is paid to all elde rly pe rsons) and the supple me nt (beca use it is gea red to low in come elde rly perso ns) mus t go to th ose wi th low in comes. A subseq uen t increase in the o ld age secu rity pe nsio n to S IOO per mon th accounted fo r two-thirds of the benefit ra te of the poor derived fro m the February 1973 budget. The tax reform legis la tion of 1972 (li ne II ) provided virt ually no be nefits for th e poorest Canad ia ns: in fac t, the richest fami ly un its received as large a benefit ra te as the poorest. The highest benefi ts went to the family uni ts in the $3.000-$6,000 income class. Hori zonta l eq uity may ha ve been improved, but vertical equity was not changed by the tax reform pack age. Thi s is ha rd ly surprising. The elimination of es tate taxes almost offset the effec t of capital gain s taxa tion on high income family uni ts. In addition, the ma in ai m of reform was effected throu gh a substantial increase in pe rsonal and other exemptions as well as th e introducti on of an employment expense deduc tion. Such exemp tions and deduction s provide re latively la rge r ta x benefits for those with higher incomes, but p rovide no tax benefits for those with in comes too low to be taxable. T he February 1973 budget may me rit a brief comme n t, since the budgetary policies had to ass ure the mino rity Libe ral gove rn ment of the suppo rt o f th e New Democ ratic Pa rty. As noted, the o ld age security pe nsio n in crease prov ided two-t hirds of the bene fi t ra te fo r the poor. O the r budge ta ry instrum en ts (includ ing a pe rsonal income tax cut, a corporate pro fi ts tax cut, indexing of th e perso nal income tax, a nd the increased fami ly allowances) se rved to provide relative ly la rge r benefits to the midd le a nd uppe r income classes than to the poorest fami ly uni ts. The aggregate effect (l ine 15) results in the richest fa mily uni ts rece ivin g a large r be nefi t ra te th a n a ny oth er income class. The govern me nt survived the Febru ary 1973 budge t to be defea led on its May 1974 budget.

168

TH E REDIST RIBUTI ON OF I NCO M E I N CA NA DA

In summ ary, federal budge tary poli cies-all tax changes and so me expenditure and transfer changes- durin g the 19705 have no t improved th e income share of the poor rel ati ve to th e rich. It is more likely that the rela ti ve positi on o f the poo r has de te rio ra ted . Third, it is more difficult (0 judge wheth er the change in government expenditures on goods and services o ther th an th ose in cl uded in Table 6.6 has effected an improvement in th e positio n of the poorest fami ly units relati ve to the richest fa mily units. Th e stabi lity over time of the composi tion of gove rnmen t pu rchases of goods and se rvices would suggest lit tl e change. The evolutio n of med icare to a full-fledged program would most li ke ly improve th e relative position of the poo r com pared with the rich, The expansion of fe deral regional economic expansion expenditures has im proved th e posi tion of rich fa mily units rela tive to poor fam ily units, On bala nce, th en. th e net effect of such changes co uld we ll be to leave the relati ve fi scal incidence meas ure unchanged, In our judgment, then, the re is no strong reason to beli eve th at th e tax component or the expenditure co mponent of fi scal incidence improved the relati ve positio n of th e poor be tween 1969 and now, In fact, the weight of th e argument here suggests th at th e tax compon ent could have facilitated a deteriorati on, The more co nse rvative position could be adopted: the relative eco no mic position of the poor and rich did not change substanti ally due to the tax and ex penditure component of fi scal incidence. As a result, the change in fa mily mo ney income can be taken as a good proxy of the ove rall change in to tal command over resources durin g the 19705. The poor, in term s of their relative comm and ove r resources, were slightly wo rse off in 1975 th an they were in 1969.

CONC LUS IONS

Between 196 1 and 1969 th e ne t con tribution of a representative high in come Ca nadi an fa mily unit fell and the net co ntri bution of a represe nta tive uppe r-mid dle income Ca nadi a n fam ily unit rose. Therefore, a represe nta ti ve high inco me Ca nad ian fa mily unit ga ined and a represe ntati ve upper-middle income family un it losl d urin g the I960s. A representati ve low income family unit also gai ned durin g th e 1960s, but th e gain was much less th a n th at of the ri ch, In short, d uri ng the 1960s the public seClo r beca me somewha t mo re benefi cial to the poo r

n'e Redistribution oj Income. 1961·1976

169

and considerably more be neficial to th e rich , mostly at the expense of the upper-middle income fami ly units.

Between 1969 and 1977 the quintile distribution of family money income became less favourable for th e poorest fifth o f Canadians. Given th e changes in taxes and governm en t expenditures during th e 1970s, it is extremely unlikely that the fiscal in cid ence was improved for the poor relative to the rich. Conseq uently, the change in the distribution of fam ily mo ney in come becomes an adeq uate measu re o f the change in rela tive income shares inclusive of govern men t redistribu ti ve activity. It fo llows that the poo res t fifth of Ca nadian fami ly units, in terms of its relative co mm and over resources, \Vas sli gh tly worse off in

1977 than in 1969. During th e past 15 years, gove rnm en ts have been un successful in increasing the degree of redistribution from the rich to th e poor such that the share of comm and over resources of the poor has increased significantly. Quite the contrary: the small relati ve gain of the poor during the 1960s has been eroded during the 1970s to leave the poor wit h no improveme nt in thei r share over the lo nger period. On the other hand, the considerable ga in of the rich during the 19605 has persisted during the early 1970s to le ave the rich with an improve ment in their share ove r tim e. Th e relative improvemen t of the rich has, for the most part, been at the expense of the median and upper-midd le income families.

Part Seven Summary and Conclusions

J

... we mllst define, wilh as milch clarit), as possible, the essential components of (I minimum standard Jo r satisfactory living- not (I subsistence standard bra olle lI'''ich aJ/ows for dign ify and decenc),. - Prime Minisler Pierre Ellioll Trudeau

We have examined in this stu dy the factu al basis for the myth tha l Canadia n govern ments d uring the rece nt post· war pe riod have su bSia n Li ve ly redistributed larger shares of inco me away fro m th e rich towa rds the poor. Th e empiri ca l evide nce does not sup po rt th e mythology. During 1969 there was redistri buti on from th e higher inco me classes to the lower in come classes; th e redistributio n was such tha t family units with low in co mes gain ed a t a highe r ra te th a n th ose with lowe r- middle to medi an in comes and family units with high in comes co ntri buted at a higher ra te th an th ose wi th im med iately lowe r incomes. In other words, there was con tin uous red istribution throughout the measured income scale. This red istributive paltern was the resu lt of a pa ttern o f tax incidence that was regressive over the poorest 36 per cent o f all family uni ts, and mil d ly regress ive ove r the upper in come classes. In add ition, the pa ttern of ex pend iture in cid ence was suffic ien tly favo urable to the poo r to ou tweigh the tax in cidence and effect a positive income red istri bu tio n to th e poor. This to tal public sector redist rib ution of inco me was effected by a federa l fisca l system that was red istributive ove r the lower income classes- but relative ly less so ove r the higher in co me classes - a p rovincial fisca l sys tem tha t was co ntinu ously redis tri but ive throughou t the measured income sca le, an d a local fisca l syste m th at was redis tribu ted away from th e lowest in come class in favo ur of th e middle and highe r income classes to a very modest degree. Fami ly units with incomes o f $ 15,000 and ove r were ne t co ntri buto rs to the federal fisca l system at the same rate as fa mily units wi th in comes o f $ 10.000$ 14,999. Th e general conclusio n o f a continuo us redi stributi on of inco me throu ghout th e in co me sca le at th e all -Ca nada level ho lds for both th e broad income and adjusted b road inco me co nceplS. The degree of net ga in for th e lowe r income cl asses for the latter inco me base was considera bly small er than fo r the form er, but th e ge neral pattern of inco me redistributi on was not altered. The genera l conclusion also holds fo r a wi de ra nge o f altern ative shirti ng hypoth eses (on th e lax and expe nditure sid e) an d altern ative hypoth eses concernin g th e be ne fits of ge neral expe ndit ures. Th e major 170

Summary alld Conclusions

171

exception occurred when the benefi ts of general expenditures were allocated proportionally to capi tal income, in which case the upper in come classes contributed to the redistributi ve mechanism a t a lowe r rate than those with immediately lower incomes. A mino r exception to this general conclusion occurred when the be nefits of genera l expenditures we re allocated in proportion to the in ve rse of the marginal utility of private good expenditure (the Aaro n and McGuire methodology), in which case the upper income classes contrib uted at the same ra te as those wi th immediately lower inco mes. The regional results are more tentative a nd prelimin ary than th e redistribution of income measures at th e all-Canada leve l of aggregation. Family units with low incomes gain ed from th e red istributive mechanism of the total public sector in Canada regardless of the region in which they li ved du rin g 1969. Family units with high incomes contributed to the redis tributi ve mechanism in all regions except the Atlantic provinces, but, except for Ontario, they contributed at the same rate as did families with incomes of $ 10,000-$ 14,999. Between 196 1 and 1969, the net contribution of a representative high income Ca nadian family unit feU and the net con tri bution of a representative upper-middle income Canad ian famil y un it rose. Therefore, a represen tative high income Canadian famil y unit gained and a represen tative upper-middle income famil y uni t lost during the 1960s. A representa ti ve low income fam ily unit also ga ined durin g the 1960s, but th e gain was mu ch less than that of the rich. In short, during the 1960s the total fiscal syste m became somewha t more beneficial to the poor and co nsidera bly more beneficial to the rich, mostly at th e expense of upper-middle income fam ily units. Between 1969 and 1977, the quintile distributi on of famil y money income became less favourable for the poorest fiflh of Ca nadians. Give n the changes in taxes and governmen t expenditures during the 19705, it is extremely unlikely that th ere was any improvement in fiscal incidence for the poor relative to the rich from th ese sources. Consequently, the change in the distribu tion of family money income becomes an adequate measure of the change in relative income shares inclusive of governm ent redistributi ve activity. It follows th at the poorest fifth of Canadian family units, in terms of their relative command ove r reso urces, was slightly worse off in 1977 than in 1969. During the 15 years under consideratjon, governments have been unsuccessful in increasing the degree of redis tributio n from the ri ch to the poor such th at the "share" of command over reso urces of the poo r has increased significa ntly. Quite th e contrary: the small relative ga in of the poor during th e 1960s has been eroded during the 1970s to leave

172

THE REDISTRIBUTION OF INCO ME I N CANADA

the poor with no improvement in their share over the longer period. On the other hand , the considerable gain of th e rich during th e 19605 has persisted durin g the ea rly 19705 to leave the rich with an improvement in their share over tim e. The rel ative improvement of th e rich has, fo r the most part, been at the expe nse o f median and upper-middle income families. This investigation has focused on establishing th e empirical found ations of the extent to which the pattern of income red istribution changed during th e recent past. One may legitimately wonder what has caused a change in fiscal red istribution of income in favour of th e rich at the expense of median and upper-middle income families during a period of time when many Canadians came to believe tha t society was becoming more egali tarian. One ca n only speculate. but it seems that three main factors account for these results. First, there is a lack of a clear commitment on the part of Canadian governments to a policy that would change relative incomes. Increasing dollar transfers to the poo r by 16 per cent during 1974 and 9 per cent during 1975, when average money incomes increased by 16 and 9 per cen t, respectively. would have done nothing to improve th e position of the poor relati ve to the avera ge in come recipient or to the rich income rec ipient. At best, il would have kept th e relati ve income posit ion of th e poor from deteriorating. Governments th at increased dollar transfers to the poor by less than 16 per cen t and 9 per cent during 1974 and 1975 were allowing the relative in come position of th e poor to deteriorate. ln addition, the total tax structure does no t facilitate increasing redistribution from rich to poor ove r time. Some erringly think that the progressive marginal statu tory rates of the personal income tax describe the effective total tax rates experienced by Ca nad ian familics. They do not. Tax loopholes which primarily benefit upper-middle income and high income fami lies reduce the income taxes of such families- and such loopholes have been increasing during the 1970s. Then, too, the forwa rd-shifted portion of the corporatc income tax, consumption-based taxes. customs duti es. p roperty taxes. and social security taxes fall relatively more heavily onto the low income a nd lower to midd le income families than o nto upper-mid dle income and high income families. Finally, the tran sfer system d oes not generate as much redistri bution from rich to poor as is commo nly supposed. Transfers th at are available to all who qualify (such demogrants as family allowance payments and old age secu rity pensions) and transfers that are posi-

Summary and Conclusions

173

lively related to income- up to the median income level (u nemployment ins urance benefits and Canada and Q ue bec pension plans)-do not concentrate dollars in the hands of th e poorest. Rather, demogrants shuffle the dollars amo ng all income classes with some bunching aro und the middle. Conseque ntly, one observes the fraction of government budgets devoted to tran sfers that increase over time, of which only a small proportion is concentrated among the poor. This study has examined how redistributive Canadian gove rnmen ts actually are. h has not considered the equally interesti ng issue of how redistributive Canadian governments ought to be. Each reader will have views on this normative issue. The results of thi s study provide the reader wi th one approximate measure of th e extent to which such preferences are successfully rea lized. Mo reover, the results suggest a note of caution. Progressives a nd social reformers ca n stop congratulating themselves for ac hi eving major strides towards an egalitarian state. Free enterp ri se en thusiasts can stop preaching the doom and gloom that is supposed to acco mpany the move towards a more egalitarian state. In Canada, at least, a larger sta te has not led to a more egalitarian state. My own view is that th e distribution of command over reso urces in Ca nada is still a long way from providing the poor with a sta ndard of living which "all ows for dignity and decency".

Notes NOTES TO PART ONE

I. Douglas H. Fullerton, "A Society Transformed : Robin Hood Runs Out of Funds", SOlurday Night. Vol. 91, no. 3 (May 1976). pp. 15-23; D. G. HartJe. "On Prophets and Power: A Commen t on the Prime Minister's Revelations", Canadian Public Policy/ Analyse de PoUtiques. Vol. II. no. 2 (Spri ng 1976). pp. 249-55; Harry G. Johnson, "Rx for economy? On ly in return to self- relia nce" (Teronlc: The Globe and Mail. Feb. 19. 1977), p. 10: a nd Tom Vclk , "Good News: Cha nges in Income Distri bu tion", Canae/ioll Forum (May 1976), pp. 2 1-23. 2. The point was cogently made by the Honourable Ma rc Lalo nde. "So the shares of fa mily in come enjoyed by these severa l income classes have remai ned remarkably stable over twe nty years, despite the enormous increases in social security payme nts. If anything the relative position of the lowest income group has dete riorated", in " Income Distributions: A Question of Commun ity Ethics", a speech delivered to the Empire Club of Canada (Toronto: October 31, 1974), p. 7, emphasis original. 3. See "Income Redistribution in Canada: Supporting Documents" (hereafier "Supporti ng Documents"), Part C, Table 9. During 1969 the poorest o ne-firth of Canadi ans had 4.3 per cent of money incomes and the richest o nc-firth had 42.6 per cent. The poorest one-firth had family money incomes of $2.952 or less. This income level fall s below the poverty lin es established by the Economic Counci l of Canada and the Senate Committee on Poverty fo r all families of two or more persons. See Special Senate Committee on Poverty, Report Ot! Po\'(my (Ottawa: Infonna tion Canada, 1971), p. 8. 4. T his obse rvation is based on the gini-coefficien t measure of inco me in eq ua lity. Ke ith Horner and Ne il Macleod, Changes in the DistributiOIl of Income ill Canada, Slarr Working Papers, No. Z-7507, Health a nd Welfa re Canada, PoHcy Research a nd Long-Range Pla nning (Welfa re) (Ottawa: May 1975), p. 21: a nd Roger Love and Michae l C. Wolfson. Income Illequality: Statistical Methodology alld Calladiall /J/Ilstrations. Statistics Canada, Catalogue 13-559 (Ottawa: Information Canada, March J976), p. 75. 5. In Canada the infonnation consists of the fall owi ng: David A. Dodge, " Impact of Ta}!;, Transfer, and Expenditure Policies of Government on the Distribution of Personal Incomes in Canada", Rel'iew of Income and Wealth, Series 21 , no. I (March 1975), pp. I-52: W. Irwi n Gillesp ie, The Incidence of Taxes and Public Expendilllres in the COl/adion Economy, Study No.2 , A Study Prepared fo r the Royal Commission on Taxatio n (Ottawa: Quee n's Prin te r, 1966); and James A. Johnson, The Incidence of GOl'enWlelll Rel'enues and Expenditures. a study prepa red for the Ontario Comm ittee o n Taxation (Toron to: Queen's Printer. 1968). 6. Susan McG uire and Brian W urts, " Implicatio ns of Mortgage Interest and Property Tax Deductions on the Distribu tio n of Income" (O uawa: Carleto n University, 1979), mimeo.

NOles

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7. Tax rate estima tes alone fo r the regions have been derived in. Alla n M. Masloyc. Tlt e Pal/em of Taxal ioll ill Canada, a stu dy prepared fo r the Economic Coun cil of Ca nada (Ouawa: Informa tion Canada, 1973). 8. See. fo r examp le. J. Dum ont-Roy and D. B. Faltacas. "The Federal Public Sector and the Interprovincial Income Redistribu tion" (Ottawa: Carle ton Un iversity. 1979). mi meo. 9. W. Irwin Gillespie and Richa rd Kerr, Tlte Impaci of Federal Regional Economic Expansion Policies on the Distribution of Irlcome in Canada. Discussion Paper 85, The Economic Council of Canada (Ottawa, April 1977). 10. T he model is most suita ble for analysin g the distributive effects of the policies of British Colum bia, Ontario, and Q uebec, the three official regions which are also provinces . The model is less use ful for analysing the distri butive effects of one of the Prairie provinces or one of thc Atlantic provi nces, since the leve l of disaggregation is th e Prairie region and the Atlan ti c region. II . Marc Lavoie. "Changes in the Tax Burden in Quebec. 1960- 1969" (0 1tawa: Ca rleton Un iversity, 1976), mimeo . 12. Mahmud ul Anam, Ardeshir Noordeh, and Syed Sajjad ur Ra hm an, "The Distributional Effects of Public Expendi tures in Post-Secondary Ed ucation: A Case Study of Ontario, 1969". baCkground pape r fo r the Conference on Canadian Incomes (Win nipeg: May 10- 12, 1979), sponsored by the Economic Cou ncil of Canada. 13. " ' ncome Redistri bution in Ca nada: Supporti ng Documents". It can be obtained from the Institute of Ca nadian Studies. Ca rleton University, Oltawa. K IS 586. 14. G ill espie. The Incidence of Taxes and Public Expenditures. 15. See note 13.

NOTES TO PA RT TWO

\. The following discussion is a summa ry of th e analysis dcveloped in somewhat more detail in W. Irwin G illespie , "The Effects of Pu blic Expendi tures on the Distri bution of Income: An Empirical Investigation" (unpublished diss., Johns Hopkins University, 1963 ); and The Incidellce of Taxes'alld Public Expenditures. 2. Social wants is used here in a broade r sense th an Musgrave originally gave to it. As we ll as encompassing wants. the satisfacti on of which can on ly be achieved by goods available in equa l amo unts for consumption by all fami ly un its, the term also covers mixed wants where a certain degree of individ ual-co nsumption and collective-consump tion aspects coexist. See R. A. Musgrave. "The Voluntary Exchange Theory of Public Economy". QU(1rterly Journ al of Economics. Vol. 53. no. 2 (February 1938). pp. 213-37; The Theory of Public Finance (New York: McG rawHill. 1959); and " Provision for Social Goods". ror The In ternationa l

176

3.

4.

5.

6.

T HE REDI STR I BUT IO N O F INCOME IN CANADA

Economics Associa tion, in J. Margolis and H. Guitton (cds.), Public Economics. An Analysis of Public Production and Consumption and Th eir Relations (0 the Private Seclors (Toronto: Macmill an of Canada, 1969), pp. 124-44. See also P. Samuelson. " The Pure Theory of Public Expenditure", Review 0/ Economics and Stallslies. Vol. XXXVI (No ve m ber 1954), pp. 387·89; " Di agra mm atic Exposition of a Theory of Public Expendilurc", Review of Economics and Statistics, Vol. XXXV II (November 1955). pp. 350-56; "Aspects of Public Expe nditures T heories", Review oj Economics and Statistics. Vol. XL (Novem ber 1958). pp. 332-38; "Contrast Between Welfare Conditions for Joint Supply and for Public G oods", Review of Economics and StQ[istics, Vol. 4 1, no. I (February 1969), pp. 26-30; and " Pure Theory of Public Expenditu re and Taxation", in Margolis and Guitton (cds.), Public Economics, pp. 98 ·1 23. The distin ction between the allocation fun ction and th e: distribution fun c· tion is not so clear cut as the text impli es, especia lly if there is validity in the notion of thc distribution of income as a "p urc" pu blic good. See, for example, Lester C. Thurow, "The Income: Distribution as a Pure Public Good", Quarterly J ournal of Economics, Vol. LXXV, no. 3 (August 197 1), pp. 327-36. Our use of the family unit aggrega tion is pri marily a matter of conve ni · ence and is not mean t to preclude examina tion, separately. of unattached individuals and families of two or more- an exam ination th at could , at such a lcvel of disaggregation, provid e fu rther usefu l co mparisons. Social wants includes mixed wants, where mixed wan ts refer to th ose wants satisfied by goods tha t are ( I) consumed in equal amounts by some groups of individu als. or (2) consumed in unequal amounts by all individuals, or (3) consumed in unequal amounts by some groups of individuals. See, for example, such recen t developm ents in the theory of mixed goods as James M. Buchanan. " An Economic Theory of Clubs", Economica, Vol. XXXII (Febru ary 1965), pp. 1-14 : Albert Breton, "A Theory of Governm ent G rants", Th e COllodion Journal of Economics and Political Sciellce, Vol. XXXI (May 1965), pp. 175-87; and Burton A. Weisbrod, "Co llective-Consumption Services of Individ ual· Consumptio n Goods", Quarterly Joumal of Economics, Vol. LXXV llt (August 1964), pp. 47 1-77 ; Musgrave, Theory of Public Finance, p. 89; and J. G. Head and C. S. Shoup, " Public Goods, Private Goods and Ambiguous Goods", The Economic Joumal, Vol. l XX IX (September 1969), pp. 567·72. For a more extensive d iscussion of theories of fiscal federalism with social goods and mi xed goods, see Musgrave, Theory of Public Finance, pp. 179-83; An thony Scott, "The Economic G oals of Federal Finance", Public Finance, Vol. XIX. no. 4 ( 1964), pp. 241-88 ; Alan Williams. "The Op timal Provision of Pu blic Goods in a System of Local Gove rnments", Journal of Political Economy, Vol. LXX IV, no. I (February 1966), pp. 1833: James H. Lynn, Federal Provincial Fiscal Relations, Stud ies of Ihe Royal Commission on Taxation, No. 23 (Ottawa : Queen's Prin ler. 1967); Gail C. A. Cook, " Public Service Provision in Melropolilan Areas", in

NOles

7. 8.

9. 10.

II.

177

Lionel D. Feldman and Michael D. Goldrick (eds.), Polilics and Go\'ernmen! of Urban Canada (Toronto: Methuen Publications, 1969), pp. 79-93; Wallace E. Oates. "The Theory of Public Finance in a Federa l System". Th e Canadian Journal of Economies, Vol. I, no. I (February 1968), pp. 37-54; and Fiscal Federalism (New York: Harcourt, Brace, Jovanovich, 1972). This description of redistribution implicitly restricts th e problem to allocation aspects. Within such a framework, stabilization and redistribution functions can be viewed as social wants, the satisfaction of which is generated in a manner similar to the satisfaction of other social wants. AJtematively, these aspects can be added as the framework is e,.;panded to allow for more than one objective. See Musgrave, Theory of Public Finance, pp. 397-401 , for a discussion of the income-sources/income-uses approach . Some discussion of th e shiftin g of taxes beyond provincial and state boundaries can be found in Richard A. Musgrave and Darwin W. DaicotT, "Who Pays the Michigan Taxes?", Michigan Tax Siudy SlDff Papers, Legislative Commiuee, Michigan House of Representatives (Lansing, Michigan, 1958), pp. 131-83; O. H. Brownlee, ESlimated Distribution of Minneso ta Taxes and Public Expendilure Benefits (Minneapolis: University of Minnesota Press, 1960); and Johnson, Incidence of Government Revenues. A more extensive and complete analysis (although within a partialeq uilibrium approach) of tax shiftin g to factors and consumers within an open economy and a federa l structure is developed in Robert H. Parks, "Th eory of Tax Incidence: International Aspects", Nalional Tax J ournal, Vol. 14 (June 1961), pp. 190-97; and Charles E. McLure, Jr., "Commodity Tax Incide nce in Open Economies", National Tax Journal, Vol. 17 (June 1964), pp. 187-204; "The Interstate Exporting of State and Local Taxes: Estimates for 1962", National Tax Journal, Vol. 20, no. I (March 1967), pp. 49-77; and "The Intc r- Regional Incidence of Ge neral Regional Taxes", Public Finance, Vol. 24, no. 3 (1969), pp. 457-83. The neutrality assumption is more reasonable in th e case of profit incomc than in the case of labour income. Dominance has figured extensively in Musgrave and Daicoff, "Who Pays the Michigan Taxes?", and McLure, " Interstate Exporting", and has been refe rred to in Gillespie, Incidence of Taxes and Go\'ernment Expendilures. The following discussion is based in part on these earlier analyses. wi th an attempt to recast the problem in general equilibrium tcrms. The term differential is used in this conte xt to apply to th e higher tax rates applied by Ontari o than by the other provi nces. (A province could have a rate of zero on some items.) The common. shared tax rates make no difference whether domi nance or non-dominance is ass umed to exist. It is only the differen tia l tax co mponent that is capable of generating the results in the tex t.

178

THE RED I STRIBUT I ON OF INCOME I N CANA DA

12. Strictly speaking, this is only true if we assume ( I) ta x reta li ation betwecn countries does not take place and (2) bilatera l joint-e xpenditure programs between countries are fi nanced by strict benefit taxation in the non-Ca nadian country. If, for examp le, the United States drew on a tax source that cou ld be exported in orde r to finance its share of the St. Lawrence Seaway Project, then Ihat part of the tax which is exported from the United States into Canada is, at least in pan, a resul t of the action of a Canadian government. However, given the limited ability of negotia ting governments to restrict each other to particular taxes for fina ncing joint projects, it is not clear to what extent the imported lax is in fact a direct result of Canadian govern me nt action. In addition, in the absence of ea rmarked taxes, it is not possible to separate out the particular tax th at is used to finance a joint project. For these reasons we are prepared to ignore this compo nent, or ass ume benefit taxation in the non-Canadian country. 13. Again, it is only the diffe re ntial in tax rates between Canada a nd the rest of the world that is the focus of atten tion. 14. This discussion abstracts from transportation costs and changes in tariff barriers, and assumes a considerable degree of immobility by business fi rms. 15. Such an approach was followed in Musgrave and DaicotT, "Who Pays the Michigan Taxes?", and Gillespie, Incidence oj Taxes and Government Expenditures. 16. Such an approach was followed in McLure, " Interstate Exporting". 17. Such a n approach was followed in Gillespie, Ill cidence oj Taxes alld Governmellt Expendilllres. 18. Such a n approach was followed in ibid. 19. An equa lly interestin g disaggregation - which the data wou ld permit would be a metropolitan (cities, populations of 30,000 and larger) and a non-metropolitan sector (small urban, popula tions of 1,000-29,999, a nd rural farm populations combined). 20. This basic income base was used for comparative purposes in an earlier study. See W. Irwin Gillespie, "An Exam ination of Tax Burden Changes in Ontario: 1960-1969". Cal/adian Tax Journal, Vol. XIX, no. 4 (Ju lyAugust 197 1), pp. 340-78. 21. See, for example, the fallowing: G. A. Bishop, "The Tax Burden by Income Class, 1958". Naliollal Tax Journal. Vol. XIV, no. I (196 1), pp. 41-59; Alfred H. Conrad, "Red ist ribution th rough Government Budgets in the Un ited States", in Alan T. Peacock (cd.), In come Redistribution and Socia! Policy (London: Jonathan Cape, 1954). pp. 178-268; Irving Jay GotTman, The Burdell oj Calladian Taxation: Allocation oj Federal. Provincial and Local Taxes among income Classes. Tax Pape r No. 29 (Toronto: Canadia n Tax Foundation , 1962); Richard A. Musgrave, J. J. Ca rroll, L. D. Cook. and L. Frane, "Distribution of Tax Paymen ts by Income Groups: A Case Study fo r 1948", National Tax Journal. Vol. tV, no. 1 ( 1951), pp. I-53: Richard A. Musgrave, "The Incidence of the Tax

Notes

22. 23.

24. 25. 26.

27.

28. 29.

30.

179

Structure and Its Effects on Consumption", in Federal Tax Policy for Economic Growth and Stability, Joi nt Com mittee on th e Economic Re· port, U.S. Congress, (Novembe r 9, 1955), pp . 96· 11 3; and "Estim ating the Distribution of the Ta x Burden", in Coli n Clark and G. Stu ve l (cds.), Income Redistribution and the Statistical Foundations of Economic Policy, Income and Wealth: Series x, Intern ational Association for Research in Income and Wealth (London: Bowes and Bowes, 1964), pp. 186·2 19. In most of these studies the income base is referred to as a broad income concept. We have substituted the term basic income because of our use of broad income for the co ncep t developed he re. This expe riment was ou tlined earlier. For a more extensive discussion of th e income base derivations and a measure of va rious expe ri ments along these lines, see W. Irwin Gillespie , "EfTect of Public Expenditures on th e Distri bution of Income", in Ri· chard A. Musgrave (cd.), Essays in Fiscal Federalism (WaShington, D.C. : The Brookings Institution, 1965), pp. 122-86; and Incidence of Taxes and Governmem Expenditures. The sa me methodology was also employed in James A. Johnson, Th e In cidence of Government Revenues and Expendi· mres, a study prepared for th e Ontario Committee on Taxation (Toronto: Queen's Printer, 1968). where "broad" and "adjusted broad " income arc designa ted as "pre -governmental" and "post.governm ental" in come, re· spectively. Those who find it awkwa rd to use such an approach may find it easier to accep t the "neu tral" income base comparison, described later. Musgrave, Theory of Public Fillal/ce, pp. 397-401. This is not meant to imply that there was no exam ination of and dis· agree ment with the income base uti lized in the very earliest stud ies: there was. See, for example. th e Musgrave·Tucker deba te of the early 1950s. See, for example, A. R. Prest, "Statistica l Ca lculations of Tax Burdens", Economica. Vol. 22, no. 87 (1955), pp. 234-45; and "The Budge t and Interpersonal Distribu tion", Proceedings of Ihe Prague Congress of the Inlernationallnstilule of Public Finance ( 1967), in Public Finance, nos. 12 (1968), pp. 80·98: and Alan T. Peacock and J. R. Shannon, "The Welfare State and th e Redistribution of Income", Westm inster Bank Review (August 1968), pp. 1· 16. Peacock and Shannon. ibid .. pp . 9· 10. A "neu tral " public sector economy is an economy with a public sector (defined as Y + B + R - T, as above) wherein the va lue of pu blic expend itures (B + R) is equal to tax payments (T) fo r each fami ly. Since B + R = T. Y + B +R - T becomes Y. The neutral income base, Y. is identical to broad income, as defined previously. This point is developed in more detail in Gi llespie, "Examination of Tax Burden Change". Bishop, "Tax Burden by Income Class. 1958", and " Income Redistribu · tion in the Framework of the National Income Accounts", Naliollal Tax J oumat, Vol. XIX, no. 4 (Dece mber 1966), pp. 378·90; Richard A. Musgrave, "Estim ating the Distribution of the Tax Burden", in Clark and

180

THE REDISTRIBUTION OF INCOME IN CANA DA

Stu vel, Income Redistribution, and Tax Burdens and Benefits 0/ GOI'ern. mem Expendilllres by Income Class, 1961 and 1965, Tax Foundation. Inc.. Research PubHcation No.9 (New York : 1967). hereafter referred 10 as Tax Foundation, S tudy (1967); Roger A. He rriat and Herm an P. Miller. "The Taxes We Pay", The Conference Board Record, The Conference Board (May 1971), pp. 31-40; and "Changes in the Dislri bution of Taxes

among Income Groups: 1961 to 1968", paper presented al the Ame rican

31. 32. 33.

34.

35.

Statistical Associa tion Meetings (Fort Collins. Colorado : August 197 1). mimeo, 20 pp. Bishop. " Income Redistribution", p. 381. Ibid .• p. 38 1: and Tax Burdens and Benefits. pp. 8·9. This seelion has benefited conside rably from the stimula ting ideas and work of George Bisho p and the Tax Foundation. While we still disagree on the proper in come base against which to measure ta x, expe nditure, lind fiscal incidence, the formulation of the approach here has been helped considerably by this carlier cri tique. It is interestin g to note th at the Tax Foundation, Stud)' (1967), gives "secondary place" to the preferred income base - the product side of the accounts - because it "ditTers substantially from the lay notion of income and because it involves the numerous problems of measuring and imput. ing the benefits of government expenditures to :dmilies at different income levels" (ibid ., p. 9, and pp. 38-41). It is a question of judgment whether one should adopt meas ures that are si milar to the common notion of "i ncome". or whether one should try to adhere to as rigo ro us a derivation of a concep tually accurate measure of income as possible. This problem was noted earlier in the discussion of the basic-income base: however, the two conceptual experime nts have been kept to as close ly as possible. in recognition that neither results in a compa rative income base that is in the lay usage. For a more extensive discussion of this point, see Musgrave, "Estimating the Distribution of th e Tax Burden", pp. 208-09. The inclusion of sales taxes in the income base serves to increase income in the lowe r-to middle-income cl asses relatively more than in th e midd le- to upper-income classes and thus accoun ts in part for the less regressive (more progressive) pauern of effective tax rates found in the Tax Fo und ation. Study (1967), when compared with most othe r tax incidence studies. Sec, fo r example. G illespie, "Effeci of Public Expenditu re". in Musgrnve (cd.). Essa)'s. Stephan Miche lson, "The Economics of Real Income Distribution", Re· view oj Radical Political Economics (Spring 1970). pp. 75·86: David M. Gordon, "Taxation of the Poor and the Normative Theory of Tax Incidence", paper de livered at the Meetings of the American Economics Asso· ciation, (December 27-30, 197 1). 25 pp .. esp. pp. 2-7: C. Reich, "The New Property", Yale Law Review, Vol. 73 (Ap ril 1964). pp. 733-88: J. Bonnen. "The Effect of Taxes and Government Spend in g on In equality", in R. C. Edwards et al.. The Capitalist System (Englewood Cliffs. N.J .. Prentice·Hall, 1972), pp. 235-43; and Larry Sawers and Howa rd M.

Notes

36. 37. 38.

39. 40.

lSI

Wachtel, "Activities of the Government and the Distribution of lncome in the United Stales", paper delivered al the 13th General Conference of the International Association for Research in Income and Wealth (Balatonfured, Hungary: September 1973),98 pp. Michelson, "Economics of Real Income Distribution", and Sawers and Wachtel, "Activities of the Government". Ibid. The orthodox methodology developed in this study is consistent with a theory of government formulation and continuation that can be loosely summarized as a liberal-democratic-Downsian type of government. See, for example, Anlhony Downs, "An Economic Theory of Politica l Action in a Democracy", J ournal oj Political Economy, Vol. LXV (April 1957), pp. 135-50; and An Econom;c Theory of Democracy (New York: Harper and Row, 1957). Within such a theoretical framework of government formu lation and continuation it is logically consistent 10 adopt a neutral government thai does nol alter the pre-lax, pre-transfer d istribution of income. The analysis of the effects of government services (including transfer payments) on the distribution of income can then be carried out within this conceptual framework. Sawers and Wachtel, "Activities of the Government", p. 12. Michelson'S discussion and extension of th e education example from Grubb's work is suggestive, but not complete. See W. Norton Grubb, "The Distribution of Costs and Benefits in an Urban Public School System", National Tax Journal, Vol. XXIV, no. I (March 1971), pp. 1-12. It is obviously correct to argue that "benefits received by" students and their families is a preferable measure of benefits 10 "COSls incurred on beha lf of" studenlS and their families. The legi timate problem is measuring fairly accurately "benefits received". Most studies have chosen to mcasure-"costs incurred on behalf of" students, recognizing that this measure is second best. It is argued that this methodology is worse than second best; it "will lead to exactly the opposite conclusion from that derived from distributing benefits per pupil" (Michelson, "Economics of Real Income Redistribution", p. 80). This conclusion, however, depends cruci ally on (I) measuring benefits as the incremen t to lifetime income (d iscounted at 5 per cen t) and (2) neglecting the average lax payment that a family in any income bracket makes, in calculating the redistribwive impact of public expenditures on education. The latter step is an incorrect procedure when the intent of the example is to exam ine redistribution via the education component of the public sector: taxes must logica lly be subtracted from benefits received. When this step is correctly allowed for, th e distribution of net benefits (in absolute term s and relative to income) declines continuously as the level of income increases, a pattern sim ilar to the "cost incurred on behalf of" method. By s;milar pattern is meant the generally declining natu re of net benefit rate as income in creases; the actual numerical magnitudes do differ. It is interesting to note that the absolute

182

4 1.

42 . 43.

44. 45.

46.

47.

48.

THE REDISTRIB UTION OF INCOME IN CANADA

nel benefi t amou nt per student declines as incom e increases, using the "bene fi ts received" approach. whereas it is fairly constant using the "COSIS incurred o n behalf o f " approach. On closer examination. then, the difference between the "COSIS incurred on behalf of" approach and the " benefits received" approach is one of degree. Effective nct benefit rates in education for th e former decli ne as income increases. evcnlually becomin g nega tive. Effective nct benefit rates in education fo r the laller decline as income increases, but a lways remain positive. In other words, the use of a more approp ria te benefit measure resu llS in all students (and their families) benefiting fro m education, with higher rates of benefit going to the lower income classes. This is not an opposi te conclusion from the standard approach which has the lower in come classes benefiting m ore than the upper income classes (wh o ex perience negative net benefits) . Ibid. Two examples are cited (contract compli ance and open unions) where the government's inaction is considered to result in higher unemployment rates among blacks and thus lower faclo r earn ings. By this line of argument, give n the governme nt's responsibility for reducing unemployment, a ny ex.isti ng unemployment (and thus lower factor earnings) would be viewed as a result of the state biasing incom e against the poor in the fi rst place. There are other more coge nt expla na tio ns for the ex.istence of unemployment in an economy . See "Supportin g Docume n ts", Part A. This procedure was no t followed in Gillespie, "Effcct of Public Expend iturc", in Musgrave (cd .). Essays; Johnson, In cidence of Governmem Expenditure; a nd o ther similar studies. See Pan Three for a m ore detailed d iscussion of the estim ating procedures used. Most U.S. tax incidence studies have included realized capital gains in the income base because the ex.istence o f a capital gain s tax. provides tax retu rn data fro m which capital gains income ca n be calcu lated . See. for example, G illespie, "Effect of Public Expe nditure", in Musgrave (cd.), Essays; Tax Fo und a tio n, Study (1967) ; and Herriot and Miller. "The Taxes We Pay", The re has been very little discussion of the inclusio n o f accrued capital gains incom e. and no attempt to estimate them fo r purposes of inclusio n. Gillespie, Incidence of Taxes and Go~'ernmenl Expenditures. did not include an estima te o f realized capital gains in the sta nd ard income base for this very reason. However. o ne o f the specialized tables aUowed for the inclusion of a hypothetical capital gains component in the inco me base in orde r to give an a pproxi mate notion of the distonion suffered from their exclusio n, (See pp. 73-75.) A more detailed description of the m ethod olOgy employed in derivi ng the estimate o f capita l gai ns income is contained in "Supportin g Documents", Pan A. Most tax incide nce studi es ma ke little if any reference to the existence

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of the difficulty. In G illespie, Incidence of Taxes and Govemmelll Ex pendilllres, it was explicitly assumcd th at "bracke t ju mpers ca rry with the m an equal proportion of inco me and of taxes" when they move from a lower to a higher income bracket (ibid., p. 8). As a result. the effective tax rate after bracket jumpers were correctly allowed for wou ld be not significan tly differen t from th e effective tax rate tha t results whe n j umpers are lert in thei r origi nal bracket. It remain s true that both taxes and in come are ove rstated - espccia lly in these brackets whe re conside rable amounts of add itions to money income are made. It is worth noting that the on ly sa tisfactory solution to this probl em is to start ofT with data on particu lar families and unattached individuals, to which can be allocated directly their non-money and impu ted in come for a ca lcul ation of basic income fo r each person that can then be used to regroup persons into income brackets. A begi nning in thIS direction has been made by Okner in the United States. In additio n, developments within Statistics Canada concerning micro-statistics data at the individual and sepa rate family level - should eventually permit one to deal more accurate ly with bracket j umpers. Unti l that time, we consider Iha t the approach adopted here is an acceptable solution. 49. The share of the lowest income bracket in " basic" income, wh ich includes transfe r payments. would be ra ised to 2. 1 per ce nt from 0.9 pe r cent. (See "Supporting Documents", Part A. Table 4.) 50. The major portion of this investigation was co mpleted befo re the appearance of the work of Professor Eugene Smolensky and his colleagues at Wisconsin, the work of Jaco b Mecrman , and th e work of Ok ner and Pechma n. See especially Jea n Behre ns and Eugene Smo lensky, "Alternative Delinitions of Income Redistribution". Institute for Research on Pove rty. Discussion Paper 185-73 (December 1973): Morgan ReynOlds and Eugene Smolensky. "The Post-Fisca l Distribution: 1961 and 1970 Compa red", Institute for Resea rch on Poverty. Discussion Paper 197-74 (March 1974), later published in The Naliollal Tax J ournal, Vol. XXV II , no. 4 (December 1974), pp. 5 15-30; Jacob P. Mee rman, "The Delinit ion of Income in Studies of Budget Incidence and Income Distribution", The Reriew of Income alld Weallh. Series 20, no. 4 (Dece mber 1974). pp. 515-22: and Josep h Pechman and Benja min A. Okner, Wh o Bears the Tax. Burden? The Brookings Institution. Studies of Government Finance (Washington, D.C.: 1974). NOTES TO PART T H REE

I. See, for example, Musgrave et aI., "Distribution of Tax Payments": and

Gillespie, blcidence of Taxes atld Public Expendilures, p. 31. 2. See "Supporting Docume nts", Part A. Tables 3, 3(a), and 3(c), fo r the implications of our interp rovincia l exportation ass um ptions. 3. See the Report of the Royal Commission on Taxation (Ottawa: Queen 's Pri nter, 1966).

184

THE REDISTRIBUTION OF INCOME IN CANADA

4. J. M. McKinnon. Chairman. Imperial Bank of Commerce, Paper delivered to shareholders. as reponed in The Globe and Mail (ToronlO: January 19. 1966). p. 6 and p. 83. 5. E. J. Benson. Proposals for Tax Reform (Ottawa: Queen's Primer. 1969). p.20. 6. Some limi ted evidence suggests th at upper income execu ti ves have not been able to shift the income tax forward. See W. G. Lewellen. "An Intersectional Analysis of Senior Executive Rewards", Proceedings of the National Tax AssociQ(ion (October 1969), pp . 381-409. Some recent attempts have been made to extend the argument 10 all labour. See. for example. L. D. Taylor. S. J. Turnovsky. and T. A. Wilson. The II/flolionary Process ;11 North American Manujactllring, Prices and Incomes Comm ission (Onawa: In format ion Ca nada, 1973): J. Johnston and M. Timbrell, "Empirica l Tes ts of a Bargaining Theory of Wage Rate Determination", Manchester School (June 1973): and D. A. L. Auld , "The Impact of Taxes on Wages and Prices", Natiollal Tax J ournal (Ma rch 1974). 7. Musgrave. The Theory of Public Finance, p. 240. 8. See. for example. G. F. Break. " Income Taxes and Ince ntives to Work ". American Economic Rel'/·ell.'. Vol. XLVII (September 1957). pp. 529-49: R. Barlow, H. E. Brazer, and James N. Morgan, Economic Behaviour of (he AJJ1uent, Studies of Gove rnm ent Finance, T he Brooki ngs Institution (Washington, D.C.: 1966), C hs. X and XI, pp . 129-70 ; Sidney E. Rolfe and Geoffrey Furness, "The Impact of Cha nges in Tax Ra tes and Method of Collection on Effort : Some Empirica l Observations", The Review of Economics and Statistics, Vol. 39 (November 1957). pp . 384401; Royal Commissio n on th e Taxation of Profits a nd Income. Second Report, Cmd. 9105 HMSO (London: 1954), App. I, pp. 91- 124; Thomas H. Sanders. Effects of Taxation on Executi\'es. Harvard University Graduate School of Business Administration (Boston: 195 1); a nd D. B. Fields and W. T. Stanbury. " Incentives, Disincen tives, a nd the Income Ta x: Furthe r Empirical Evidence" , Public Finance. Vol. XXV, no. 3 ( 1970). pp. 38 1-4 15; a nd " Income Taxes and Incentives to Work: Some Additional Empirica l Evidence", American Economic Review. Vol. LXI, no. 3 (June 1971). pp. 435-43. 9. Sanders. Effects of Taxation. 10. Roya l Commission on th e Taxation of Profits a nd Income, p. 11 5. Eq ua lly interesting was the findin g that only 4 per cen t of the en tire sample knew precisely (and were correct about) the tax rate structure around their own se t of marginal rates - an ext reme ly low degree of tax consciousness (p. 119). II. Break, " Income Taxes", p. 549. 12. Fie lds and Stanbury, " Incentives, Disincen tives. and th e Income Tax" . 13. Barlow, Braze r. a nd Morgan. Economic Beha\'ior of the AfJ1l1en t. 14. "Lead Editorial". The Globe alld Mail (Toronto : March 8. 1968). p. 6. IS. Richard A. Musgrave. "Direct Shifting of the Corporation Income Tax

Notes

185

in Manufacturing: Comme n!" , American Economic Association, Papers and Proceedings, Vol. L1 V (May 1964), p. 302. 16. Report o f the Roya l Comm ission on Taxa tio n (Ottawa: Qu een's Printer, 1966), Vo l. I, p. 27. 17. Ibid., pp. 285-86 : :md Josep h A. Pechman, Federal Tax Policy, Studies o r Gove rnment Finance, The Brook ings Institution, Revised ed. (Wash in gIon. D.C.: 1971), pp. 112-13. 18. William J. Baumol, Business Beh(ll'iour. Value and Growth (New York: Macmillan. 1959). esp. pp. 27-82, "On the Th eory of Oligopoly". Economica, Vol. xxv (Aug. 1958), pp. 187-98; and Economic Theory and Operations AnalySiS (Englewood Cliffs, N.J.: Prentice-Hall. 1961), pp. 198-205. 19. Sec Evsey D. Dom ar a nd R. A. Musgrave, " Proportiona l Income Taxation and Risk T ak ing", Quarterly J ourl/al of Economics, Vol. 58 (May 1944), pp. 387-422: and James E. Tobi n, " Liq uidity Prere rence lls Behaviour Towards Risk", Review of Economic SlIIdies. Series 2, Vol. 25 (February 1958), pp. 65-87. 20. See, for example. M. A. Adelman, "The Corporate Income Tax in the Lo ng Run", The Journal of Political Economy. Vol. 65, no. 2 ( 1957), pp. 15 1-57; E. Cary Brown, "The Corpo rate Income Tax in the Short Run ", National Tax JOlfrl/al, Vol. VII (1954), pp . 240-41: Jo hn C. Clende nin , "Effect of Corpora te Income Taxes o n Co rporate Ea rnings". Taxes- The Tax MagaZine, Commerce Clearing House, Inc .. Vol. 34, no. 6 ( 1956). pp. 39 1-96: Arnold C. Harbe rger. "The Corpora tion Inco me Tax: An Empirical Appraisal", Tax Rel'isiorl Compendium, Vol. I, Commiuee o n Ways and Means, Un ited Sta tes Government Printing Office (Washingto n, D.C.: November 16, 1959). pp. 231-50; Auge ne M. Lerner and Eldon S. Hendriksen, "Federal Taxes on Corporate Income and the Rate of Return on Investment in Man ufacturing, 1927 to 1952", Na lional Tax Jour1101. Vol. IX, no. 3 ( 1956), pp. 193-202; a nd B. M . Ratchford and p, B. Ha n, "The Burden o f the Corpora te Income T ax", National Tax J ournal, Vol. x, no. 4 (1957), pp. 310-24. 21. Richard A. Musgrave, "Effects of Tax Po licy o n Pri va te Capital Formation". in Fiscal and Debt Management Policies, Commission on Money and C redil ( 1963), pp. 45-143 . 22. John G. Cragg. Arnold C. Harberger. a nd Pe ter Miesz.kowski. "Empi rical Evidence on the Incide nce o r the Corpora tion Income Tax", JOIITl/al of Political Economy. Vol. 75. no. 6 (December 1967), pp. 8 11 -2 1; Richa rd Goode, "Rates of Return, Income Shares. and Corporate Tax Incidence", in, M. Krzyz.aniak (cd.). Effects of Corporation Income Tax, Papers prese nted at th e Sym posium on Business Taxation, Wayne Sta te Un iversity Press (Detroit. 1966), pp. 209-46; Robert J . Gordon, "The Incid ence of the Corporation Income Tax in U.S. Manufacturing, 1925- 1962", American Economic Review, Vol. 57, no. 4 (September 1967), pp. 73 1-58: Challis A. Ha ll. J r., "Direct Shifti ng of the Corpora tion Income Tax in Manuracturing". American Economic Rel'iew. Papers and Proceedings.

186

TUE REDISTRIBUTION OF I NCOME IN CANADA

Vol. L1V, no. 3 (May 1964), pp. 258·7 1; Arnold C. Ha rbcrgcr, "The Incidence of the Corpora tion Income Tax", J ournal of Polilical Economy Vol. LXX, no. 3 (June 1962), pp. 2 15·40; a nd "Efficiency EfTccts of Taxes on Income from Capita l", in Krzyzaniak (cd.), Effects of Corporalioll Income Tax. pp. 107· 17: R. W. Kilpatrick. "The Short-Run Forward Shifti ng of the Corpora tion Income T ax", Yale Economic Essays (Fall 1965) pp. 355-420: M. Krzyza nia k and R. A. Musgrave. The Shifling of

the Corporatiotl Illcome Tax, All Empirical Study oj its Short-Run EJJecl UpOIl Ihe Rate 0/ Retllm (Ba ltim ore: The Johns Hopkins Press. 1963); R. J. Levesque, The Shiftillg of the Corporate Income Tax ill Ihe Shorr Run ,

23.

24. 25. 26.

27. 28. 29. 30. 3 1. 32. 33. 34. 35. 36.

Siudies of the Roya l Commission on Taxation, No. 18 (Ottawa: Queen's Printer, 1967); Byron G. Spencer, "The Shifting of the Corpora tion Income Tax in Canada", CaflOdion Journal oj Economics, Vol. 2, no. I (February 1969). pp. 21-34; Richard E. Sl itor, "Corporate Tax Incidence: Econom ic Adjustm ents to Differentia ls under a Two-Tier Tax Structure", in Krzyzan iak (cd.), Effecls 0JCorporaliolllllcome Tax, pp. 136-208. For an exce llent survey of the literature of th e I960s, see Peter Mieszkowski. "Tax Incidence Theory: The Effects of Taxes on the Distribution of Income", The JOllrnal oj Ecollomic Lileramre, Vol. VII , no. 4 (December 1969), pp. 11 03 ·25. Krzyzaniak a nd Musgrave. Shifting oJ the Corporation iI/come Tax. Spencer, "Sh iftin g of the Corporation Income Tax in Canada". R. J. Gordon, "The Incide nce of the Corporation Income Tax in U.S. Manufacturin g: Reply", American Economic Review, Vol. 58, no. 5 (December 1968), pp. 1366-67, extended the beginning of th e time period from 1935 to 1924 a nd fou nd th at the sign of the consumpt io n variable changed: Cragg. Ha rberger. and Mieszkowsk i, "Empirical Evide nce", added the employment rate as a cyclical variable and dummy va riables fo r the mobilization and war years ( 1941, 1942, 1950. 1951. and 1952) and found that shinin g fell to 60 per ce nt and the tax va ri able became insignificant. Ha U, " Direct Sh iftin g" . Musgrave, "Direct Shifting of the Corporatio n Income Tax in Manufacturing: Comm ent", ibid . J. L. Turek, "Short Run Shifti ng of the Corporate Income Tax in Manu· facturing, 1935-1956", Yale Economic Essays, Vol. 10 (1970), pp. 127-47. Gordon, "Incidence of Corporation Income Tax: Reply". Mieszk owski, "Tax Incidence T heory". p. 111 8. Kilpa trick, "Short·Term Forwa rd Sh ifting": Levesq ue, Shiftillg oj the Corporate II/come Tax . Gordon, " Incidence of Corporate Income Tax", p. 752; Mieszkowsk i, "Tax Incidence Theory". p. 1119. Gillespie, Incidence oJ Taxes and Public Expenditures. pp. 67 -70. Musgrave, Theory oj Public Fillallce. pp. 347-85. See. for example. David G. Davies. "An Empi rical Tes t of Sales Tax Regressivi ty", The Jou",al oj Pofilical Ecollomy. Vol. 67, no. I ( February

187

NOles

37.

38,

39.

1959), pp. 72-78: Gerhard N. Rostvold, " Distribution of Property, Retail Sales. and Personal Income Tax Burdens in Cali forn ia: An Empirica l Analysis of Inequity in Taxation", Nat ional Tax JOIJrnal, Vol. XIX, no. I (March 1966), pp. 38-47. For a different interprctatio n of resu lts, see Orland E. Nelson, "Progressivi ty of the Ontario Retail Sales Tax", Canadian Tax Journal, VoL XV III, no. 5 (September-October 1970), pp. 411-15, For a more complete discussion of the general manufactu rers' sales tax in Canada, see John F. Due, Tlte General Manufaclllrers' Sales Tax in COl/ada, Canadian Tax Papers. NO.3 (Toronto: Canadia n Tax Foundation, 195 1); Sales Taxation (London: Rou LJedge and Kegan Paul. 1957), pp. 149-74; and Report of the Royal Commission on Taxation. Vol. 5 (O ttawa: Queen's Printer, 1966), pp. 1-81. See, for example, Report of the Royal Commission on Taxation. Vol. 5, pp. 59-60 and 169-71; John son. Incidence of GOI'ernmenl Rel'ellues and Report of Iile Ontario Commillee on Taxation (Toronto: Queen 's Printer, 1967), Vol. I. Ch. 5. and Vol. II I, pp. 214-29. Even the Report of the Roya l Commission on Taxation, which was very favourably inclined towards the food exemption "acknowledged that a general sales would be incapable of eliminating regressiveness at high income levels" (ibid., p. 60). For a much more critica l view of the food exemption as a means of reducin g tax burdens on the poor. see John F. Due, " Development of Retail Sales Taxes in the 1960s and I 970s", Calladian Tax Journal, Vol. XIX, no. 6 (November-December 1971), pp. 545-5 1. During 1969 the rates varied between 3 and 6 per cenl. Only Albe rta does not have a retail sales tax. Manitoba is the major exception to this statement, alth ough Prince Edward Island also taxes some se rvices. For a more complete examination of provincial retail sales taxes, see Joh n F. Due, Provincial Sales Taxes, Ca nad ian Tax Papers. Nos. 7 and 37, (Toronto: Ca nadian Tax Founda tion, 1953 and 1964); Sales Taxatio", pp. 272-89; " Applica tio n of Sales Ta xes to Producers' Goods". Cunadia" Tax J ournal, Vol. XV II , no. 5 (September-October 1969), pp. 354-60; and "Developme nt of Retail Sales Taxes in th e 1960s and 19705": Donald I. Beach, "The Manitoba Sales Tax", Canadian Tax Journal. Vol. XV, no. 3 (May-June 1967), pp. 320-25: and Kenyan E. Poole, Th e Rerail Sales Tax: An Economic Sludy. A Study Prepared for the Ontario Committee on Taxa tion (foronto: Queen's Printer, 1967). pp.3 1-80. Report of lire Royal Commission on Taxation, Vol. 5. pp. 9-10: and Th e Ontario Commillee on Taxation. V~. III, p. 28 1. Musgrave, Th eory of Public Fbwllce, p. 359. It is more likely that in cases of complementary goods in consumption the distributional effects would be similar to the taxed good. If data in sufficien t detail we re ava ilable this hypotheSis could be subject to a critical lest. Therefore, it is at least refutable. For a more detailed

t..,.

40. 41. 42.

43 . 44.

45,

188

THE RED I STRIBUTION OF I NCOME IN CANADA

analysis of the advantages and limitations of the entire neutrality aspect of the argument, sec Musgrave, "Direct Shifting: Comment", p. 12. 46. For an alternative view, thai such taxes arc borne by factor owners in proportion 10 their shafe in total income. sec Earl R. Rolph, The Theory of Fiscal Economics (Berkeley and Los Angeles: University of California Press, 1956); Earl R. Rolph and George F. Break. "The Incide nce of Consumption Taxes", 1961 Proceedings oj the 541h Annual Conference Oil Taxation, (Pennsylvania: National Tax Association 1962). pp. 625-32: and O. H. Eldridge. "Equality, Administration and Compliance. and Inter-Governmental Fiscal Aspects", The Role of DireCI and Indirect Taxes in the Federal Rel'enue System, a Conference Repon of the National Bureau of Economic Research and th e Brookings Institution (Princeton: Princeton University Press, 1964), pp. 141-215. 47. It wou ld appear that the im portance of the property tax in Canada is not exceeded by any other western country. See Dick Netzer, Economics of the Propert), Tax, Studies of Government Finance. The BrOOkings Institution (Washington. D. c.: 1966), pp. 1 and 12. 48. Among the extensive literature. see. for example. Fleming Jenkin. "On the Principles which Regu late the Incidence of Taxes". Proceedings of the Royal Society of Edinburgh. Session 187 1-72. reproduced in American Economics Association, R. A. Musgrave and C. Shoup (cds.). Readings in fhe Ecollomics of Taxatioll (New York: Irwin Co .. 1959). Vol. IX, pp. 22739; Edwin Ca nnon, testim ony in "M inutes of the Royal Comm ission on Local Taxation, 1899", rep roduced in ibid .. pp. 172-201: Jens P. Jensen. Property Taxation ill fhe United States (Chicago: Unive rsi ty of Chicago Press. 1931): Herbert A. Simon. "The Incidence of a Tax on Urban Real Property". Quarterly J oumal of Ecollomics. Vol. LVII. no. 3 (May 1943). reproduced in Musgrave and Shoup (eds.). Readillgs, pp. 416-35: and Neller, Ecollomics of fhe Properl), Tax. 49. For a more complete discussion of these points. see Ca nnon's testimony in "Mi nutes of the Roya l Com mission, 1899". and Netze r. Ecoflomics of lite Properly Tax. pp. 36-40. 50. See. for example. Musgrave and Daicoff. "Who Pays the Michigan Taxes?": Johnson. Incidellce of Governmellt Rel'ellues; G. Alden Scars, " 'ncidence Profiles of a Real Estate Tax and Earned Income Tax: A St udy in the Formal, Differential Incidence of Selected Local Taxes". National Tax Journal, Vol. XV III , no. 4 (December 1964), pp. 340-56. 51. Jense n, Property Taxation, pp. 69-75. 52. In fact. he found a positive correlation between increases in tax rates and increases in property values; see Darwin W. Daicoff. "Capitalization of the Property Tax" (u npu blished Ph.D. disserta tion, 1961). as summarized by Netzer, Economics of Ihe Property Tax , pp. 34-35. 53. F. O. Woodward and Ro nald W. Brady. "Inductive Evidence on Tax Capitalization". National Tax Journal, Vol. XV III . no. 2 (June 1965). pp. 193-201. For over half the farms in the sample. most of which were sold at low prices. there was incomplete capitalization.

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54. John H. Wicks, Robert A. Litlle. and Ralph A. Beck , " A Note on Capitaliza tion of Property Talt Changes", National Tax J ournal. Vol. XX I, no. 3 (Septembe r 1969). pp. 263·65. 55. W. Oates. "The Effect of Property Taltes and Local Public Spendin g on Property Values: An Empirical Study of Talt Capitalization and the Tiebout Hypothesis". Th e J oumal 0/ Political Economy. Vol. 77 (Nove mber·De