November 27, 2017STUDY: INTRA-HOUSEHOLD LABOUR INCOME RESPONSES TO CHANGES IN TAX RATES Faced with an aging workforce, increasing life expectancies and pressure on the solvency of public pension plans, Canadian governments have responded by increasing the retirement age, provided incentives to increase older workers (income-splitting pension incomes) to remain in the labour force, and improved the sustainability of public pension systems.
Recently, Statistics Canada released its study in the Daily on Intra-household Labour Income Responses to Changes in Tax Rates Among Older (In January 2017, the results of the study were released via video, see below). The study examines the intra-household responses of older Canadians to policy changes in income tax rates and after-tax income.
Intra-household
Intra-household response was affected by juridiction. In France, where the tax unit is couples, labour market household hours are responsive to changes in the tax code. In Canada, where the tax unit is individuals, there was also a labour liabilities effect, where spousal labour supply decisions also considered intra-household disposable income.
Tax rates - average vs marginal
Canadian income tax schedules may be complex. Individuals demonstrate their tax illiteracy when they use the average tax rate as a proxy for the marginal price. Given the marginal tax rate generally exceeds the average tax rate, by not taking true marginal costs into account properly, older workers over-supply their labour. .
Longitudinal Administrative Databank (LAD)
The LAD provided the data needed to carry out intra-household analysis. While individuals file tax returns independently in Canada, couples data (intra-household data) were created from a 20% sample of all filed tax returns (535,000 individuals and their sponses), either by matching spousal social insurance number listed on individual tax returns, or matching based on name, address, age, sex, and marital status. Data from the databank is in Stata format.
Canadian Tax and Credit Simulator (CTaCS)
The LAD has summary data from individual tax returns, it does not provide data on tax rates. The CTaCS was used to simulate individual tax liabilities.
Summary of Findings
Is the tax code a viable policy lever for influencing labourv supply?
The study finds that a decrease in income tax rates affected the labour supply decisions of older workers in several ways:
- An increase in after-tax income resulting from a reduction in income taxes induced some older workers to leave the work force.
- Higher after-tax incomes also encouraged those older workers who remained in the workforce to increase their labour supply.
- Changes in individuals’ tax rates had spillover effects on the employment decisions of their spouses
- Workers responded more to changes in the average tax rate than the marginal tax rate.
Source: Study: Intra-Household Labour Income Responses to Changes in Tax Rates among Older Workers | Report | 11F0019M
Other Links
Video (30 minutes): Intra-Household Labour Income Responses to Changes in Tax Rates among Older Workers
Research Tool: Canadian Tax and Credit Simulator: CTaCS
Marginal / Average Tax Calculator: Simply Tax