Wednesday, May 7, 2014

Inequality and Income Redistribution across Canada

The purpose of income redistribution policy is to reduce inequality through taxation and transfer. Wealthier households’ capital and labor incomes are taxed and directly or indirectly transferred to poorer households. The direct transfers include child and employment tax credits, and unemployment insurance. The indirect transfers include some medical and healthcare benefits, and subsidies to nurseries. In Canada, both the federal and provincial governments are responsible for income redistribution.

The Ginicoefficient is commonly used to measure and compare inequality in income distribution across households, before and after redistribution.
In Canada, income redistribution helped significantly reduce inequality over the period 1976-2011. 

Gini Coefficient, All Family Units’ Pre and After Tax Incomes, 1976-2011, Average, Canada and its Provinces, NL: Newfoundland and Labrador, PE: Prince Edward Island, NS: Nova Scotia, NB: New Brunswick, QC: Quebec, ON: Ontario, MB: Manitoba, SK: Saskatchewan, AB: Alberta, BC: British Columbia, Data Source: Statistics Canada
Figure 1: Gini Coefficient, All Family Units’ Pre and After Tax Incomes, 1976-2011, Average, Canada and its Provinces, NL: Newfoundland and Labrador, PE: Prince Edward Island, NS: Nova Scotia, NB: New Brunswick, QC: Quebec, ON: Ontario, MB: Manitoba, SK: Saskatchewan, AB: Alberta, BC: British Columbia, Data Source: Statistics Canada
The province of Newfoundland and Labrador shows the highest average pre-tax income degree of inequality, which .53, and the pre-tax income inequality index in Alberta, .46, is the lowest. After redistribution, income inequality in Newfoundland and Labrador has gone below the .37 Canadian averages. Prince Edward Island has the lowest after-tax income average degree of inequality, which is .34. Moreover, the pre-tax income inequality is higher on the Eastern part of Canada, mainly from Newfoundland and Labrador to Quebec, than in the rest of the country while the after-tax income inequality is lower in Eastern Canada.

Compared to the late 1970s, pre-tax income inequality has risen all over Canada except in the province of Prince Edward Island. 
Gini Coefficient, All Family Units’ Pre and After Tax Incomes, 1976-2011, Canada and its Provinces, Data Source: Statistics Canada
Figure 2: Gini Coefficient, All Family Units’ Pre and After Tax Incomes, 1976-2011, Canada and its Provinces, Data Source: Statistics Canada

From the late 1970s to the early 1990s, while the pre-tax income inequality was upward trended, the after-tax inequality was decreasing.