How much Income Tax do you Pay? That depends on Your Income, and Your Age – The School of Public Policy Report

Who pays taxes in Canada, and how much? Is Canada’s income tax system progressive? Do the rich pay enough? These are questions that are often the subject of debate for policymakers and pundits. It turns out though, that there is another question that needs to be asked – How old are you?

A report authored by Daria Crisan, Kenneth J. McKenzie and Jack Mintz and released at a media conference in Ottawa today, examines how tax rates differ by age and income group, and how those rates change over taxpayers’ lifetimes. It turns out that while Canada’s tax system is very progressive, insofar as those who make more money pay a greater percentage of their income in taxes, there is a complicating fact – age.

The report uses annual income data from 2008 to study tax incidence in Canada and assesses the progressivity of the Canadian tax system. It looks at how average tax rates differ not only across income groups, but also across age groups, because it is important to understand income and taxes in the context of life cycles.

There are several aspects of this study that are unique compared to previous tax incidence studies in Canada. Crisan states “Although we undertake a fairly standard static or annual tax incidence analysis, rather than adopting a lifetime approach, we parse the data by age cohort. This is in contrast to most static studies of tax incidence, which group all cohorts together. This cohort approach allows us to consider the distribution of the burden of the tax/transfer system both within and across age groups.”
The result? The tax system does a good job at reducing income inequality in Canada. It taxes progressively and redistributes significantly. But, that redistribution is very age dependent. Seniors see a great deal of age redistribution, so do young people to a lesser degree. But if you’re middle aged, you’ll pay a higher percentage of tax, regardless of income. That matters in terms of public policy. According to author Daria Crisan, “too often we think of progressive taxes on one scale – income earned. But the story is more complex than that. We need to factor in what people get from government against what they pay, and we need to understand that age matters. Middle-aged people, with the same incomes, pay more and get less than the young and the old. So when designing a tax system, we need to move beyond the 10%-90% or 1%-99% paradigm. Just saying ‘tax the rich’ is too simplistic and does not reflect the reality of how taxes, income and age influence each other. And, if reducing income inequality is one of the objectives of the tax policy, we have already achieved that. The Canadian fiscal system already lowers income inequality significantly, particularly after the age of 65.”

The paper can be downloaded here.