The Role of Government in Canada

Income Distribution and Poverty

Income Distribution in Canada

2011 AVERAGE TOTAL INCOME:

Two-parent families*

One-parent families*

$93,700

$45,100

* this is an average for all households - therefore includes both one and two income households.

Therefore - gov’t faces challenge to promote income equity.

Attempt to do this through:Taxation policies Transfer payments

(i.e. the tools of fiscal policy)

The Lorenz Curve- summarizes how equally on unequally income is distributed.

- Perfect Equality - all households earn an identical amount.

- the more bowed the curve, the more inequality that exists.

Why does income inequality exist?

✴Risk taking:

✴Ability:

- i.e. start your own business - could make millions, could lose everything.

- i.e. due to various skills, talents, education available.

✴Wealth:- i.e. due to investments, or inheritance.

The Poverty Line:- no actual line exists.

- A Canadian household is said to be poor if it has to spend more than 54.7% of its pre-tax income on food, clothing, and shelter.

- therefore the actual dollar figure depends on the number in the household and the community of residence.

Causes of poverty:

Gender - single females make up highest level of poverty.

household - single household higher incidents of poverty.

age - youngest and oldest main wage earners = poorest households.

employment - working poor - often primary industries.

education - usually lack of high school diploma.

region - Maritimes, Quebec, Ontario - which has 1/3 of Canada’s poor.

Transfer payments:Gov’t transfer of funds to other levels of gov’t. and/or individual households.

The Five Federal Gov’t transfers to households are:

Old Age Security (OAS)

Guaranteed Income Supplement (GIS)

Child Tax Credit

Employment Insurance

Quebec and Canada Pension Plans

Transfer payments to Provinces and Territories

from the federal government and to be allocated to:

health care

post-secondary education

welfare services (with municipalities.)

The Canadian Income Tax System:

Known as a Progressive Tax System - the more you make the more you pay.

the top 2% of Canadian (those earning +$100,000/year pay 26% of all income taxes.

the bottom 60% (those earning less than $25,000/year pay only 8% of all income taxes.

therefore the argument is that tax cuts will deliver most of the cash to those who need it least.

BUT... lets look at an example. (With the story of ten dinner guests)

If a $100 dinner bill were divided among 10 diners the way taxes are paid the result would be as follows:

The first four guests (the poorest) would pay nothing.

The fifth would pay $1The sixth - $3

The seventh - $7

The eighth - $12

The ninth - $18

The tenth (the richest) - $59

Now...assume that after dining at the same restaurant night after night the owner decided to that since they were such good customers they could be given a break on the bill. The daily meal was now reduced by $20

Dinner like Taxes

First four guests pay 0.

The fifth would pay $1

The sixth - $3

The seventh - $7

The eighth - $12

The ninth - $18

The tenth (the richest) - $59

$100 tab $80 tab

- continue to pay 0

- also pays 0

- now pays $2

- now pays $5

- now pays $9

- now pays $14

- now pay $49

Dinner like Taxes

First four guests pay 0.

The fifth would pay $1

The sixth - $3

The seventh - $7

The eighth - $12

The ninth - $18

The tenth - $59

$100 tab $80 tab

- continue to pay 0

- also pays 0

- now pays $2

- now pays $5

- now pays $9

- now pays $14

- now pay $49

Savings

$1 or 100%

$1 or 33%

$2 or 28%

$3 or 25%

$4 or 22%

$10 or 16%

In this example the first four continued to each for free and each of the other six was better off that before.

- But - then they started to compare:

The sixth guest complained “I only got a dollar out of the $20 saving, but he (pointing to the tenth guest) got $10.”

The Fifth guest agreed “Yeah, I only save a dollar too. It’s unfair that he got more than me.”

“That’s true” the seventh guest added. “Why should he get $10 back when I only got $2? The wealthy get all the breaks.”

“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor.”

At this point, as though this story were written by Shakespeare, the nine men surrounded the tenth and beat him up.

The next night the tenth guest didn’t show up for dinner, so the nine dined without him.

When it came time to pay the bill, however, they discovered something important. They didn’t have enough money between all of them to even pay half the bill.

And that is how the tax system works.

The people who pay the highest taxes get the most benefit from a tax reduction.Tax them too much, attack them for being wealthy, and they just may not show up at the table anymore. Fine dinning can be found all over the world.

The Laffer Curve

The relationship between levels of taxation and possible government revenues.