Study: Federal Personal Income Tax: Slicing the Pie

The one-tenth of Canadian taxfilers who were in the highest earnings bracket provided more than one-half of the revenue from federal personal income tax in 2002, according to a new study. In addition, their share of the tax pie has been increasing since 1990.

In 1990, this 10% of taxfilers accounted for 46.0% of total federal personal income tax; by 2002, this group accounted for 52.6%. This increase reflects faster income growth and a smaller reduction in effective tax rates for this group relative to others.

At the other end of the scale, the one-half of taxfilers with the lowest incomes saw their share of the tax pie decline during the same period.

In 1990, this group accounted for 6.7% of total federal personal income tax paid; in 2002, this proportion had declined to 4.4%. In fact, this group paid less federal personal income tax in 2002 than in 1990, in spite of higher incomes.

Intermediate-income earners were the biggest winners in terms of effective tax rate. For this group, the rate went from $11.75 in federal tax paid for each $100 of income to $10.14, a decline of $1.61.

Incomes grew more rapidly than income tax

Between 1990 and 2002, Canadians saw their total income grow more rapidly than their federal personal income tax bill. While federal tax increased 49.4%, total income went up 63.8%.

However, this gap was entirely attributable to developments in just two years: 2001 and 2002. During this time, total income continued to rise while revenue from federal tax declined slightly.

This decrease in federal tax paid between 2000 and 2002 was due notably to a decline in marginal tax rates. The federal government lowered tax rates applicable to Canadians' incomes in 2001.

Capital losses registered as a result of the stock market decline of the early 2000s also contributed to the decline in federal tax revenues.

Thus, Canadians saw the effective federal tax rate, that is, the federal tax paid for each $100 of income, decline during this 12-year period.

In 1990, taxfilers on average paid $12.25 of federal tax for each $100 of income. By 2002, the corresponding amount had declined to $11.18, a difference of $1.07.

Overall during this period, the effective federal tax rate ranged between $11.00 and $12.50 for each $100 of income. However, there was one exception. In 1994, the effective federal tax rate was $10.37 for each $100 of income.

This result for 1994 was due to a change made to the federal personal income tax, more specifically the elimination of the $100,000 capital gains exemption. This change prompted many taxfilers to realize capital gains accumulated over previous years.

This had a major impact on total income without, however, significantly affecting the total federal tax paid.

The 10% with the highest incomes paid more than one-half of federal personal income tax

The group comprising the 10% of taxfilers with the highest income (more than $64,500 in 2002) provided more than 50% of the federal personal income tax revenue in 2002. Between 1990 and 2002, the share of federal tax paid by this group went from 46.0% to 52.6%.

This increase was attributable to two factors: a smaller drop in the effective tax rate than that of the other two groups of taxfilers, combined with an increase in their share of total income.

This group had the highest effective tax rate in 2002, even though the rate dropped during the 12-year period. In 1990, these individuals paid $17.79 in federal tax for each $100 of income. By 2002, this rate had declined to $16.47. This decline of $1.32 was the smallest of the three groups of taxfilers in this study.

On the other hand, this 10% of taxfilers was the only group whose share of total income increased during the 12-year period. In 1990, these individuals accounted for 31.7% of all income; by 2002, their share had risen to 35.7%.

Among the three groups of taxfilers, only those with the highest incomes contributed a share of federal personal income tax greater than their share of total income.

In 2002, their share of federal personal income tax was 52.6%, well above their 35.7% share of income. In addition, this was the only group in which the gap between the share of income tax and share of income actually widened in the 12-year period.

Definitions, data sources and methods: survey number 4107.

The analytical article Federal Personal Income Tax: Slicing the Pie, no. 24 (11-621-MIE2005024, free) is now available online in the Analysis in Brief series. From the Our products and services page, under Browse our Internet publications, choose Free, then Business enterprises.

For more information, or to enquire about the concepts, methods or data quality of this release, contact Duane Hayes (613-951-3764), Tax Data Division.