The tale of the tails: Revisiting recent trends in Canadian after-tax income inequality using Census data

We present new evidence on levels and trends in after-tax income inequality in Canada between 1980 and 2000. We argue that existing data sources may miss changes in the tails of the income distribution, and that much of the changes in the income distribution have been in the tails. Our data are constructed from Census files, which are augmented with predicted taxes based on information available from administrative tax data. After validating our approach in predicting taxes on the Census files, we document differences in the levels and trends in after-tax inequality between the newly constructed data source and the more commonly used survey data. We find that after-tax inequality levels are substantially higher based on the new data, primarily because income levels are lower at the bottom than in survey data. The new data shows larger long-term increases in after-tax income inequality and far more variability over the economic cycle. This raises interesting questions about the role of the tax and transfer system in mitigating both trends and fluctuations in market income inequality.