Canadians' income mobility must be part of the debate on tax reform

Contact:

Jason Clemens, Director of Fiscal Studies
The Fraser Institute
Telephone: (604) 714-4544
Email: jasonc@fraserinstitute.ca

Release Date: 11 January 2001

VANCOUVER, BC — Current discussions of poverty and tax reform often fail to take into account the fact that most Canadians' incomes change substantially over the course of their lives says a new article, "Who We Are Now, Isn't Who We Were Then," published in the January issue of Fraser Forum, The Fraser Institute's monthly magazine.

"When discussing critical public policy issues such as poverty and tax reform, taking a simplistic snapshot view of society is not accurate. We live in a mobile society where people's lives change, sometimes dramatically, over the years," says Jason Clemens, director of fiscal studies at The Fraser Institute.

Income distribution offers a clear example of ill-formed policy analysis. Failure to incorporate Canadians' income mobility into the discussion results is a misleading depiction of reality at best, and, at worst, can end in damaging public policy. Advocates for an interventionist state argue that the distribution of income as it currently stands is unjust. However, this judgement incorrectly assumes that people are fixed in their income stations.

Canadian data suggests that our income mobility is fairly dynamic. An upcoming Fraser Institute research study, Flat Tax: Principles and Issues, to be published in the spring, explains how to assess tax policies, given these life-cycle patterns and income mobility. The study presents Canadian research based on Statistics Canada's Survey of Labour Income and Dynamics which concludes that between 1995 and 1996, 24 percent of families earning incomes in the lowest two quintiles found themselves at least one quintile higher just one year later.

"That means that in a single, one-year period, almost a quarter of families that were previously in the bottom 40 percent of income increased their earnings sufficiently to move up at least one income group," notes Clemens.

The Canadian income mobility evidence is even more notable when the analysis is extended to a 5-year period. A total of 45 percent of those families in the bottom two quintiles of earned income moved up at least one quintile over the five-year period of the study.

As well, nearly 21 percent of all families moved up one quintile in earnings. Another 8 percent moved up more than one quintile over the five-year period.

Evidence from the United States and Britain also shows that being in the low-income bracket isn't permanent for a large majority of people and that individuals move from one level of income to another to a relatively high degree.

Given that income increases and decreases over an individual's lifetime, it is clear that an entire lifetime is the proper framework in which to analyze tax reform. The effect of a change in the tax system must be assessed upon a person's lifetime tax liability rather than simplistically and quite incorrectly assessing its effect in a particular year.

"Rather than acknowledging people's varying stages of life in discussions of income distribution, taxation, and poverty, many commentators look just at the current period, and evaluate only the short-term impact of a new policy, " concludes Clemens, "people's lives are clearly not static."

Established in 1974, The Fraser Institute is an independent public policy organization based in Vancouver, with offices in Calgary and Toronto.

For further information or for a copy of the January issue of Fraser Forum contact:

Suzanne Walters, Director of Communications,
The Fraser Institute, (604) 714-4582,
Email suzannew@fraserinstitute.ca

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