Income Instability and Fiscal Progression

by Garcia-Medina, B. Cecilia and Wen, Jean-Francois

We construct the ratio of the post-fisc transitory income variance to the pre-fisc transitory income variance of family incomes as a measure of fiscal progressivity in Canada between 1993 and 2008. This ratio can be interpreted as measuring the extent to which the fiscal system attenuates personal income instability. We find that the tax and transfer system has been less effective in stabilizing market incomes after 1998 compared to the previous years. This is attributable to the provincial and federal tax reforms from 1999-2001, which particularly affected families headed by individuals with less than high school education. While the reforms reduced the effective marginal tax rates faced across all educational groups, the reduction is relatively larger among families with highly educated main earners. Moreover, the group with less than high school education is distinct in that the average effective tax burden in this group increased. Changes to Social Assistance also appear to have played a role.

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