Analytical Studies Branch Research Paper Series
Market Behaviour Versus Tax Planning Responses to Changes in Marginal Income Tax Rates Among Older Couples

by Derek Messacar
Social Analysis and Modelling Division, Statistics Canada

Release date: November 19, 2018

Abstract

The standard model of labour supply predicts that individuals’ taxable incomes will bunch at convex kink points in the budget set created by government tax and transfer systems. However, empirical evidence of such behaviour is scarce. Using administrative tax data from Canada, this paper estimates bunching responses in taxable income among older individuals at discontinuities in marginal tax rates created by federal and provincial and territorial systems, from 2001 to 2012. The results show that bunching is prevalent across the income distribution, but this is mostly driven by married individuals from 2007 onward. Further analysis reveals this occurs predominantly because pensioners split some of their pension income with their spouses who tend to have lower marginal tax rates. Pensioners do this pursuant to the introduction of this tax planning program in the 2007 federal budget. These findings offer credible evidence of significant intra-household tax planning behaviour that depends on the availability of deductions.

Keywords: pension income; elasticity of taxable income; tax planning; income splitting; bunching; empirical density design

Executive summary

This paper investigates the extent to which older Canadian taxfilers, aged 60 to 69, respond to predictable changes in marginal tax rates created by the tax and transfer system by exhibiting sorting behaviour in taxable income. More precisely, the prediction from the standard model of labour supply that individuals’ taxable incomes bunch at convex kink points in their budget sets is tested, in an empirical density design.

Using administrative tax data for the years from 2001 to 2012, the analysis assesses how individuals respond to changes in marginal tax rates created at the lower bounds of the second, third and fourth federal tax brackets; the lower bounds of the second and third provincial and territorial tax brackets; and the thresholds at which the Old Age Security and Employment Insurance benefits start being clawed back through recovery taxes. The results indicate the following.

  1. Taxable income is responsive to the changes in tax rates at the thresholds analyzed. Bunching is observed at every threshold. Hence, individuals are sorting in their taxable incomes in response to the tax and transfer system, as expected.
  2. Bunching appears the most prevalent among married (either legally married or in a common-law relationship) individuals from 2007 onward.

However, a closer inspection shows the following:

  1. Bunching is driven primarily by individuals who are married and who used the pension income splitting provision of the tax code, pursuant to the introduction of this program in the 2007 federal budget.
  2. In contrast, the bunching responses to changes in income tax rates appear to be negligible among
    1. unmarried individuals
    2. married individuals before 2007
    3. married couples who do not have at least one spouse receiving private pension income and are ineligible for pension income splitting.

These findings offer credible evidence of intra-household tax planning behaviour that depends on the availability of deductions. Effectively, couples are not only using the pension income splitting program to reduce their own tax liabilities but also taking into account the marginal tax rates of their spouses to minimize household tax liabilities, as expected.

1 Introduction

Income taxes are often found to have small effects on individuals’ labour supply decisions and other economic behaviour (e.g., investment decisions) and large effects on individuals’ tax planning responses (Saez, Slemrod and Giertz 2012). Individuals can delay or avoid paying higher income taxes in many ways, such as by making tax-deductible charitable donations or contributions to retirement savings vehicles (Stiglitz 1985; Auten, Sieg and Clotfelter 2002; Bakija and Heim 2008). Shifting income from the personal to the corporate tax base is also a potential tax planning channel among business owners (Goolsbee 2000; Gordon and Slemrod 2000; Kreiner, Leth-Petersen and Skov 2014). Evidence suggests that the elasticity of taxable income (ETI) with respect to the marginal tax rate—a measure once viewed as a sufficient statistic for the efficiency cost of taxation (Feldstein 1995, 1999; Slemrod and Yitzhaki 2002)—depends on the availability of deductions and, therefore, can be manipulated by policy makers (Kopczuk 2005).

In general, the ETI is an incomplete measure of the deadweight loss from taxation when some burden of sheltering income is incurred as a resource or transfer cost (Chetty 2009). If the unit of taxation is the individual, sheltering can occur within households when family members split income—provided that resources are not shared, as in the unitary model of the household (Kornhauser 1993; Cantillon and Nolan 1998; Freiler, Stairs and Kitchen 2001; Gelber 2014). Consequently, a better understanding of the extent to which older couples reduce personal income tax liabilities through splitting warrants investigation.

The goal of this study is to assess the extent to which income taxes induce changes in market behaviour (sometimes called “real” responses) versus changes in tax planning strategies. The paper focuses particularly on income splitting between spouses as the channel through which tax avoidance may occur. Market response refers to a change in actual economic activity by individuals—such as a change in employment income through an adjustment in the number of hours worked. Tax planning response refers to the use of allowances, credits and deductions to reduce tax liabilities while holding constant economic behaviour.

The paper makes two key contributions. The first contribution is to use administrative data on a 20% nationally representative sample of Canadian taxfilers, for the years from 2001 to 2012, to estimate, in an empirical density design, the effects of changes in marginal tax rates on the taxable incomes of older individuals aged 60 to 69 (Saez 2010; Chetty et al. 2011). The standard model of labour supply predicts that individuals will bunch at convex kink points in their budget sets created by government tax and transfer systems, but evidence of such behaviour is scarce (Saez, Slemrod and Giertz 2012). This study finds significant bunching at various convex kink points along the income distribution associated with the lower bounds of the federal and provincial and territorial tax brackets, where marginal tax rates increase discontinuously as a result of tax progressivity. In addition, bunching is observed at two convex kink points where effective marginal tax rates change, namely the income thresholds where Employment Insurance (EI) and Old Age Security (OAS) benefits start being clawed back through recovery taxes. In these cases, responses are observed only among EI recipients and OAS-eligible individuals.

The second contribution of this paper is to estimate how much of this bunching is the result of intra-household tax planning. In theory, the magnitude of tax avoidance or evasion should be proportional to the expected costs of such behaviour, including costs from administration, effort or detection (Allingham and Sandmo 1972; Stiglitz 1985; Slemrod and Yitzhaki 2002). Pension income splitting in Canada is both legal and notional in the sense that it does not require a transfer of income or division of asset ownership. Pension income splitting is a no-cost tax avoidance channel for older couples; consequently, take-up is predicted to be high.Note 1 To separately identify the effect of splitting from other types of market behaviour or tax planning responses, the analysis exploits exogenous variation in individuals’ eligibility to split pension income by marital status and around the introduction of this program.Note 2 Moreover, the data provide information on whether individuals and their spouses are pension income recipients and the actual amounts of income they elect to split. This facilitates a direct comparison of bunching between couples who could have used or did use this tax provision and those who did not use it.

The results of this analysis show that bunching is only weakly observed before pension income splitting was introduced, as well as among unmarried individuals and couples who were ineligible for splitting after the reform was introduced. In contrast, the magnitude of bunching, after pension income splitting was introduced, among individuals collecting a private pension income or whose spouses do so is substantial. Further analysis conditional on whether splitting actually occurs shows that the bunching stems mostly from the use of this program. Within couples, bunching occurs from one of two possible behaviours:

  1. an individual, who is a pensioner, sends enough income to a spouse to reduce taxable income to a lower tax bracket; or
  2. an individual, whose spouse is a pensioner, receives income only up to the point where taxable income would otherwise enter a higher tax bracket.

Hence, pensioners are not only using this tax planning tool to lower their own tax liabilities but also to lower household tax liabilities, taking into account the marginal tax rates of their spouses. These findings offer credible evidence of intra-household tax planning behaviour that depends on the availability of deductions.

This paper contributes to a growing literature that seeks to disentangle market behaviour from tax planning responses to personal income taxation. Prior research shows that income shifting, both intertemporally and across tax bases, is substantial among high-income earners and the self-employed who have the most access to tax planning technologies (Gordon and Slemrod 2000; Goolsbee 2000; Chetty et al. 2011; le Maire and Schjerning 2013; Kreiner, Leth-Petersen and Skov 2014, 2016; Harju and Matikka 2016). However, few studies consider the extent to which families coordinate to reduce combined tax liabilities. This is likely because many studies that estimate the ETI are carried out using data from the United States, where the unit of taxation is the household. Other studies look at countries where the unit of taxation is the individual, but where household-level tax return data or the policy variation needed for proper identification are not available. A notable exception is Stephens and Ward-Batts (2004), who showed that the 1990 reform from joint to individual taxation in the United Kingdom led to an increase in the sharing of assets claimed by spouses with lower marginal tax rates. Wolfson and Legree (2015) used data from Canada on business owners and their families who work for the business and live in the same household. They posited that business owners make labour and dividend payments strategically to reduce household tax liabilities.Note 3 This paper is among the first to assess how, following the introduction of a mechanism that was explicitly designed to facilitate tax planning at the household level, taxable income responds to marginal tax rates within couples. It also relates more broadly to the work of Gugl (2009), who analyzed intra-household equity considerations of pension income splitting.

Since this paper centres on the responsiveness of older couples to income taxation, it relates to a large literature on the labour supply decisions of the elderly. Many studies investigate how pension receipt or retirement decisions are influenced by the design of public pension plans (Baker and Benjamin 1999; Feldstein and Liebman 2002; Baker, Gruber and Milligan 2003; French and Jones 2012). However, few studies consider the extent to which the tax code is a viable policy instrument for influencing the labour supply decisions of older workers (Schmidt and Sevak 2009; Alpert and Powell 2014; Messacar 2017). Lastly, this paper adds to a developing literature that estimates income responses to taxation using the empirical density design (Saez 2010; Chetty et al. 2011; le Maire and Schjerning 2013; Bastani and Selin 2014; Harju and Matikka 2015).

This paper proceeds as follows. The next section, Section 2, gives an overview of the standard model of labour supply and derives the bunching prediction; it includes a brief discussion of the empirical density approach for estimating excess mass. Section 3 summarizes features of the Canadian income tax system of relevance to the empirical analysis. Section 4 discusses the data and sample selection used in this study. Section 5 presents the baseline results, the analysis of the pension income splitting reform, two placebo checks, and tests of heterogeneous responses. Section 6 concludes.

2 Background

This section presents an overview of the theory of labour supply prediction that individuals bunch at convex kink points in their budget sets. Then, the method for estimating this bunching behaviour is briefly discussed. In particular, the theoretical and methodological contributions of Saez (2010) and Chetty et al. (2011), which are of direct relevance herein, are provided. The reader is encouraged to refer to those papers directly, as well as to the wide-spanning ETI literature discussed in Saez, Slemrod and Giertz (2012), for more information.

2.1 Theory

Saez (2010) considered the standard model of labour supply, in which an agent i MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacaWGPbaaaa@38AF@ ’s utility depends positively on after-tax income, c i MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacaWGJbWdamaaBaaaleaapeGaamyAaaWdaeqaaaaa@39F1@ , and negatively on before-tax income, z i MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacaWG6bWdamaaBaaaleaapeGaamyAaaWdaeqaaaaa@3A08@ . The agent prefers to consume more but is hindered by the effort cost of supplying labour to earn more. The utility function is given by u i ( c i , z i ) MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacaWG1bWdamaaBaaaleaapeGaamyAaaWdaeqaaOWdbmaabmaa paqaa8qacaWGJbWdamaaBaaaleaapeGaamyAaaWdaeqaaOWdbiaacY cacaWG6bWdamaaBaaaleaapeGaamyAaaWdaeqaaaGcpeGaayjkaiaa wMcaaaaa@4120@ and satisfies several conditions: (1) u i / c i >0 MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacqGHciITcaWG1bWdamaaBaaaleaapeGaamyAaaWdaeqaaOWd biaac+cacqGHciITcaWGJbWdamaaBaaaleaapeGaamyAaaWdaeqaaO Wdbiabg6da+iaaicdaaaa@41A8@ ; (2) u 2 / c 2 <0 MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacqGHciITcaWG1bWdamaaCaaaleqabaWdbiaaikdaaaGccaGG VaGaeyOaIyRaam4ya8aadaahaaWcbeqaa8qacaaIYaaaaOGaeyipaW JaaGimaaaa@4104@ ; (3) u/z<0 MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacqGHciITcaWG1bGaai4laiabgkGi2kaadQhacqGH8aapcaaI Waaaaa@3EF7@ ; and (4) u 2 / z 2 <0 MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacqGHciITcaWG1bWdamaaCaaaleqabaWdbiaaikdaaaGccaGG VaGaeyOaIyRaamOEa8aadaahaaWcbeqaa8qacaaIYaaaaOGaeyipaW JaaGimaaaa@411B@ .

To begin, suppose an agent faces a linear budget set with a constant marginal tax rate t MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacaWG0baaaa@38BA@ , so that after-tax income is c=z( 1t ) MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacaWGJbGaeyypa0JaamOEamaabmaapaqaa8qacaaIXaGaeyOe I0IaamiDaaGaayjkaiaawMcaaaaa@3EF7@ . A graphical depiction of the solution to this optimization problem is shown in Panel A of Figure 1. The agent will provide effort and earn income up to the point where the marginal benefit of consumption equals the marginal disutility of effort. For agent i MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacaWGPbaaaa@38AF@ , this results in the optimal levels of before-tax income, z i MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacaWG6bWdamaaDaaaleaapeGaamyAaaWdaeaatuuDJXwAK1uy 0HwmaeHbfv3ySLgzG0uy0Hgip5wzaGqba8qacqWFgls5aaaaaa@45F5@ , and after-tax income, c i MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacaWGJbWdamaaDaaaleaapeGaamyAaaWdaeaatuuDJXwAK1uy 0HwmaeHbfv3ySLgzG0uy0Hgip5wzaGqba8qacqWFgls5aaaaaa@45DE@ . The assumption that agents are heterogeneous in before-tax income because of underlying differences in preferences or ability is captured by heterogeneity in the utility function. The figure shows how the solution to this optimization problem varies across agents.

figure 1 Theoretical prediction of agents’ bunching responses to a convex kink in the budget set as a result of tax progressivity

Description for figure 1

The title of Figure 1 is “Theoretical prediction of agents’ bunching responses to a convex kink in the budget set as a result of tax progressivity.” Figure 1 consists of three charts: “Panel A — Constant tax rate; “Panel B — Progressive tax rate”; and “Panel C — Bunching.” In Panels A and B, the y axis title is “Consumption, c,” and in Panel C, “Density distribution.” The x-axis title for the three charts is “Before-tax income, z.” The explanation for each panel is given in the explanatory note below, which appears at the bottom of the figure.

Note: Panel A shows the optimal levels of before-tax and after-tax incomes for an agent with preferences given by the indifference curve shown, facing tax rate t MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr 4rNCHbGeaGqiVCI8FfYJH8YrFfeuY=Hhbbf9v8qqaqFr0xc9pk0xbb a9q8WqFfeaY=biLkVcLq=JHqpepeea0=as0Fb9pgeaYRXxe9vr0=vr 0=vqpWqaaeaabiGaciaacaqabeaadaqaaqaaaOqaaabaaaaaaaaape GaamiDaaaa@3705@ . Panel B shows how agent k MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr 4rNCHbGeaGqiVCI8FfYJH8YrFfeuY=Hhbbf9v8qqaqFr0xc9pk0xbb a9q8WqFfeaY=biLkVcLq=JHqpepeea0=as0Fb9pgeaYRXxe9vr0=vr 0=vqpWqaaeaabiGaciaacaqabeaadaqaaqaaaOqaaabaaaaaaaaape Gaam4Aaaaa@36FC@ , who would optimally consume z k MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr 4rNCHbGeaGqiVCI8FfYJH8YrFfeuY=Hhbbf9v8qqaqFr0xc9pk0xbb a9q8WqFfeaY=biLkVcLq=JHqpepeea0=as0Fb9pgeaYRXxe9vr0=vr 0=vqpWqaaeaabiGaciaacaqabeaadaqaaqaaaOqaaabaaaaaaaaape GaamOEa8aadaqhaaWcbaWdbiaadUgaa8aabaWefv3ySLgznfgDOfda ryqr1ngBPrginfgDObYtUvgaiuaapeGae8NXIuoaaaaa@4442@ given a constant tax rate, chooses z i MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr 4rNCHbGeaGqiVCI8FfYJH8YrFfeuY=Hhbbf9v8qqaqFr0xc9pk0xbb a9q8WqFfeaY=biLkVcLq=JHqpepeea0=as0Fb9pgeaYRXxe9vr0=vr 0=vqpWqaaeaabiGaciaacaqabeaadaqaaqaaaOqaaabaaaaaaaaape GaamOEa8aadaqhaaWcbaWdbiaadMgaa8aabaWefv3ySLgznfgDOfda ryqr1ngBPrginfgDObYtUvgaiuaapeGae8NXIuoaaaaa@4440@ in the presence of the convex kink changing the marginal tax rate to t+dt MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr 4rNCHbGeaGqiVCI8FfYJH8YrFfeuY=Hhbbf9v8qqaqFr0xc9pk0xbb a9q8WqFfeaY=biLkVcLq=JHqpepeea0=as0Fb9pgeaYRXxe9vr0=vr 0=vqpWqaaeaabiGaciaacaqabeaadaqaaqaaaOqaaabaaaaaaaaape GaamiDaiabgUcaRiaadsgacaWG0baaaa@39C9@ . This puts agent k MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr 4rNCHbGeaGqiVCI8FfYJH8YrFfeuY=Hhbbf9v8qqaqFr0xc9pk0xbb a9q8WqFfeaY=biLkVcLq=JHqpepeea0=as0Fb9pgeaYRXxe9vr0=vr 0=vqpWqaaeaabiGaciaacaqabeaadaqaaqaaaOqaaabaaaaaaaaape Gaam4Aaaaa@36FC@ on a lower indifference curve (thick solid purple line) than under a constant tax rate (dashed purple line). Agents i MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr 4rNCHbGeaGqiVCI8FfYJH8YrFfeuY=Hhbbf9v8qqaqFr0xc9pk0xbb a9q8WqFfeaY=biLkVcLq=JHqpepeea0=as0Fb9pgeaYRXxe9vr0=vr 0=vqpWqaaeaabiGaciaacaqabeaadaqaaqaaaOqaaabaaaaaaaaape GaamyAaaaa@36FA@ and j MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr 4rNCHbGeaGqiVCI8FfYJH8YrFfeuY=Hhbbf9v8qqaqFr0xc9pk0xbb a9q8WqFfeaY=biLkVcLq=JHqpepeea0=as0Fb9pgeaYRXxe9vr0=vr 0=vqpWqaaeaabiGaciaacaqabeaadaqaaqaaaOqaaabaaaaaaaaape GaamOAaaaa@36FB@ optimally choose before-tax incomes at or below the convex kink point, and are therefore unaffected by it. Panel C shows the effect of the convex kink on the distribution of before-tax income. The distribution under a constant tax rate is smooth around the kink point (solid blue line). As a result of the kink, agents with before-tax incomes from z i MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr 4rNCHbGeaGqiVCI8FfYJH8YrFfeuY=Hhbbf9v8qqaqFr0xc9pk0xbb a9q8WqFfeaY=biLkVcLq=JHqpepeea0=as0Fb9pgeaYRXxe9vr0=vr 0=vqpWqaaeaabiGaciaacaqabeaadaqaaqaaaOqaaabaaaaaaaaape GaamOEa8aadaqhaaWcbaWdbiaadMgaa8aabaWefv3ySLgznfgDOfda ryqr1ngBPrginfgDObYtUvgaiuaapeGae8NXIuoaaaaa@4440@ to z i +d z i MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr 4rNCHbGeaGqiVCI8FfYJH8YrFfeuY=Hhbbf9v8qqaqFr0xc9pk0xbb a9q8WqFfeaY=biLkVcLq=JHqpepeea0=as0Fb9pgeaYRXxe9vr0=vr 0=vqpWqaaeaabiGaciaacaqabeaadaqaaqaaaOqaaabaaaaaaaaape GaamOEa8aadaqhaaWcbaWdbiaadMgaa8aabaWefv3ySLgznfgDOfda ryqr1ngBPrginfgDObYtUvgaiuaapeGae8NXIuoaaOGaey4kaSIaam izaiaadQhapaWaa0baaSqaa8qacaWGPbaapaqaa8qacqWFgls5aaaa aa@4ABF@ bunch at z i MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr 4rNCHbGeaGqiVCI8FfYJH8YrFfeuY=Hhbbf9v8qqaqFr0xc9pk0xbb a9q8WqFfeaY=biLkVcLq=JHqpepeea0=as0Fb9pgeaYRXxe9vr0=vr 0=vqpWqaaeaabiGaciaacaqabeaadaqaaqaaaOqaaabaaaaaaaaape GaamOEa8aadaqhaaWcbaWdbiaadMgaa8aabaWefv3ySLgznfgDOfda ryqr1ngBPrginfgDObYtUvgaiuaapeGae8NXIuoaaaaa@4440@ , creating a spike in the distribution under progressivity (dashed orange line), and the density above z i +d z i MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr 4rNCHbGeaGqiVCI8FfYJH8YrFfeuY=Hhbbf9v8qqaqFr0xc9pk0xbb a9q8WqFfeaY=biLkVcLq=JHqpepeea0=as0Fb9pgeaYRXxe9vr0=vr 0=vqpWqaaeaabiGaciaacaqabeaadaqaaqaaaOqaaabaaaaaaaaape GaamOEa8aadaqhaaWcbaWdbiaadMgaa8aabaWefv3ySLgznfgDOfda ryqr1ngBPrginfgDObYtUvgaiuaapeGae8NXIuoaaOGaey4kaSIaam izaiaadQhapaWaa0baaSqaa8qacaWGPbaapaqaa8qacqWFgls5aaaa aa@4ABF@ shifts to z i MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr 4rNCHbGeaGqiVCI8FfYJH8YrFfeuY=Hhbbf9v8qqaqFr0xc9pk0xbb a9q8WqFfeaY=biLkVcLq=JHqpepeea0=as0Fb9pgeaYRXxe9vr0=vr 0=vqpWqaaeaabiGaciaacaqabeaadaqaaqaaaOqaaabaaaaaaaaape GaamOEa8aadaqhaaWcbaWdbiaadMgaa8aabaWefv3ySLgznfgDOfda ryqr1ngBPrginfgDObYtUvgaiuaapeGae8NXIuoaaaaa@4440@ .

The source for this figure is Statistics Canada, based on the model and bunching prediction of E. Saez, 2010, “Do taxpayers bunch at kink points?”, p. 184.

That the response in taxable income occurs through the labour supply adjustment is referred to as a market behaviour response. In other words, the actual behaviour of economic agents is being affected by income taxation in a standard manner as predicted by economic theory. To understand how workers are expected to respond, suppose that a convex kink were introduced in the budget set at income z ˜ MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qaceWG6bWdayaaiaaaaa@38DE@ by increasing the marginal tax rate from t MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacaWG0baaaa@38BA@ to t+dt MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacaWG0bGaey4kaSIaamizaiaadshaaaa@3B7E@ on income earned above this tax threshold. Panel B of Figure 1 shows that, in this case, workers with earnings below the tax threshold (agents i MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacaWGPbaaaa@38AF@ and j MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacaWGQbaaaa@38B0@ in the figure) remain unaffected and continue to consume their initial amounts. However, an agent earning from z ˜ MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qaceWG6bWdayaaiaaaaa@38DE@ to z ˜ +d z ˜ MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qaceWG6bWdayaaiaWdbiabgUcaRiaadsgaceWG6bWdayaaiaaa aa@3BD6@ (agent k MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacaWGRbaaaa@38B1@ in the figure), who initially consumed c k MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacaWGJbWdamaaDaaaleaapeGaam4AaaWdaeaatuuDJXwAK1uy 0HwmaeHbfv3ySLgzG0uy0Hgip5wzaGqba8qacqWFgls5aaaaaa@45E0@ under the scenario of a constant tax rate, now finds it optimal to consume c i MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacaWGJbWdamaaDaaaleaapeGaamyAaaWdaeaatuuDJXwAK1uy 0HwmaeHbfv3ySLgzG0uy0Hgip5wzaGqba8qacqWFgls5aaaaaa@45DE@ . Hence, the convex kink in the budget set results in an excess of agents who optimally bunch at the convex kink point in before-tax income. Panel C of Figure 1 shows how the density distribution of before-tax (taxable) income is expected to look—within the context of the theory—under the scenarios of a constant or progressive piecewise-linear tax system. In contrast, a “tax planning” response refers to the use of allowances, credits or deductions to modify taxable income so that bunching occurs but without any change in actual economic behaviour.

The standard prediction from the economic model assumes labour income (or another type of income that requires effort) is the primary income source. Especially among older workers, adjustments may be prevalent—compared with young and middle-aged workers—through transitions into flex-time, part-time (e.g., partial retirement) or bridge employment. If an individual’s main source of income requires no effort to collect, such as pensions, the size of the response is unclear. The response may be smaller because collecting income beyond a particular tax threshold has no effort cost. However, pensioners face an intertemporal trade-off between receiving an extra dollar at a higher marginal tax rate and delaying the receipt of that dollar until the following year, at a lower marginal tax rate. Bunching may be especially prevalent because the amount of pension income received can be manipulated. This issue is especially important in the context of this study, because only approximately one-third of taxfilers have employment earnings.

In addition, labour supply may not respond as predicted by the stylized model for many reasons. For example, many workers may have strict preferences to work a fixed number of hours per week. Similarly, employers may offer contracts with hours constraints. Search costs of changing jobs can significantly reduce the extent to which bunching at discontinuities in the marginal tax schedule occurs—this issue is explored in detail by Chetty et al. (2011). On balance, common labour frictions that are not always well represented in canonical models can significantly affect actual responses. The findings from this study, which centre on the introduction of pension income splitting, serve to credibly identify the effect of this tax planning tool on the ETI, which is analogous to that of a difference-in-differences approach.

2.2 Estimation

The approach developed by Saez (2010) and extended by Chetty et al. (2011) for estimating bunching in an empirical density design is used. To that end, the “bunch_count” Stata module (an “.ado” file) written by Olsen (2011) is employed in the analysis. This empirical procedure is briefly described here, with a discussion of how to interpret the results.

The approach begins by normalizing taxable income relative to the convex kink point analyzed; for example, having relative taxable income equal to zero in the reference year means taxable income was exactly equal to the tax threshold. Using this normalized taxable income variable, the study groups individuals with incomes within $10,000 on either side of the tax threshold into bins of width $250 (e.g., from -$10,000 to -$9,751, from -$9,750 to -$9,501, from -$9,500 to -$9,251), and bin counts (frequencies) are computed.

Then, a counterfactual density distribution is estimated. This gives a prediction of what the distribution would have looked like under a constant tax rate over the relevant range of taxable income. The counterfactual is estimated by fitting a polynomial to the bin counts, excluding data near the kink, where actual bunching would influence these results. The procedure adjusts for the fact that individuals at the convex kink point must come from other points to the right of this kink. The estimate of bunching is the excess mass around the convex kink point relative to the average density of the counterfactual earnings distribution within a range of income close to the convex kink point.Note 4

For a bunching estimate b MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaacbiaeaa aaaaaaa8qacaWFIbaaaa@38AF@ obtained from this procedure, the point estimate indicates that the excess mass around the convex kink point is b MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaacbiaeaa aaaaaaa8qacaWFIbaaaa@38AF@ % of the height of the counterfactual distribution within the range of income close to the convex kink point. A parametric bootstrap procedure is used to compute standard errors for b MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaacbiaeaa aaaaaaa8qacaWFIbaaaa@38AF@ .

3 Institutional details

Personal income tax in Canada is based on a measure of taxable income minus any permitted deductions; then credits are applied to determine the net amount payable. The unit of taxation in Canada is the individual. However the income tax system recognizes that individuals may have reduced abilities to pay income taxes when they have dependent spouses or relatives. This is provided for in the form of additional credits and of transfers of certain dependents’ unused credits to the taxpayer.

Income taxes are determined at both federal and provincial and territorial levels. Each government applies its own tax rates to a uniform measure of taxable income and offers its own credits to determine the net amount of income taxes owed. In 2012, federal taxable income was divided into four brackets. The tax rate was 15% for the first bracket ($42,707 or less), 22% for the second bracket (from $42,708 to $85,414), 26% for the third bracket (from $85,415 to $132,406), and 29% for the fourth bracket ($132,407 or more). This tax progressivity creates the convex kink points in individuals’ budget sets that are expected to induce bunching responses. The federal basic exemption in 2012 was $10,822, such that the marginal tax rate applied to taxable income below this threshold was 0%.Note 5

At the provincial and territorial levels, the income tax structures and rates are significantly heterogeneous. For example, Alberta imposed a flat tax rate of 10% in 2012 on taxable income above a basic personal exemption of $17,282. The provinces that had only two tax brackets in 2012 were Newfoundland and Labrador, Prince Edward Island, Quebec, Ontario, Manitoba and Saskatchewan. The provinces and territories with three tax brackets in 2012 were New Brunswick, Northwest Territories, Yukon and Nunavut. The provinces with four tax brackets in 2012 were Nova Scotia and British Columbia. In general, provinces and territories set thresholds for their tax brackets that fall within the federal tax brackets. For example, in 2012, the lower bounds of the second and third brackets were the following: $32,893 and $65,785 in Newfoundland and Labrador; $39,020 and $78,043 in Ontario; and $37,013 and $74,028 in British Columbia. The differences between federal and provincial and territorial brackets are useful for the empirical analysis to separately identify bunching at these various convex kink points.

In addition to estimating bunching at these federal and provincial and territorial tax thresholds, this study also considers the extent to which individuals respond to clawback provisions in the OAS and EI programs. First, the OAS pension is a demogrant for individuals starting at age 65 (Baker, Gruber and Milligan 2003) based on Canadian legal status and residence requirements; the maximum annual OAS pension was $6,540 in 2012. However, if annual net world income exceeds a pre-specified amount, recipients must repay part or all of their pension benefits. In 2012, the threshold was $69,562, and the recovery tax rate was 15%.

Second, EI is a public insurance program providing temporary financial benefits to unemployed individuals, including regular benefits for those who lose their jobs through no control of their own and sickness benefits for people unable to work because of sickness or injury. Individuals who received regular benefits with net incomes exceeding a pre-specified threshold, which was $57,375 in 2012, may have been required to repay 30% of the lesser of net income in excess of the threshold or the total regular benefits paid in the tax year.

On January 1, 2007, the federal government implemented pension income splitting, which permits individuals to split income drawn from private pensions with their spouses. The pension recipients who are sending income (“pensioners”) may allocate up to 50% of eligible pension income to their spouse (“transferees”) to reduce joint tax liabilities. For those aged 65 years and older, eligible income includes annuity and registered retirement income fund payments, registered retirement savings plan annuity payments and other types of pension and retirement compensation. However, for those under age 65, eligible income is limited to registered pension plan (RPP) payments and certain benefits received as a result of the death of a spouse. As mentioned earlier, this transfer is notional in the sense that no direct transfer of income or division of asset ownership takes place. To declare the amount of pension income to be split each year, couples simply fill out and submit a form with their tax returns.

4 Data and sample selection

This study is based on an analysis of the Longitudinal Administrative Databank (LAD), a panel dataset comprising a 20% nationally representative sample of Canadian taxfilers. The sample was derived from T1 Family File (T1FF) income tax data from the Canada Revenue Agency. The T1FF is a yearly cross-sectional dataset of taxfilers and their census families. Individuals file tax returns independently in Canada, but census families were created in the T1FF according to the spousal social insurance number listed on each individual’s tax form or by matching the name, address, age, sex and marital status. As a result, the LAD contains a wide set of variables about demographics, earnings, income, taxes, transfers, credits, allowances and savings for the individuals represented and their spouse. The LAD is updated annually to ensure accurate cross-sectional representation. The tax data do not provide a direct measure of individuals’ marginal tax rates. To overcome this issue, these rates are calculated using the Canadian Tax and Credit Simulator (CTaCS) of Milligan (2016).

Table 1 presents the descriptive statistics for the sample used in this analysis. On average, individuals are 64.1 years old, of whom 52.0% are women and 72.3% are married (i.e., legally married or in common-law relationships; see Footnote 2). In addition, the table shows that a significant fraction of individuals have labour earnings from employment (34.7%) or self-employment (9.1%), investment income (44.6%), OAS income (42.8%), and private pension income (38.9%). The mean value of taxable income, conditional on these values being strictly positive, is $39,550, and the median value is $28,300 (expressed in 2012 constant dollars). Using CTaCS, the mean value of the predicted marginal income tax rate is 22.1%, and the median value is 23.6%.

Table 1
Descriptive statistics
Table summary
This table displays the results of Descriptive statistics Mean and Median, calculated using years, percent and 2012 constant dollars units of measure (appearing as column headers).
Mean Median
years
Demographics
Age 64.1 64.0
percent
Female 52.0 Note ...: not applicable
Male 48.0 Note ...: not applicable
Married 72.3 Note ...: not applicable
Employment and income
Has employment earnings 34.7 Note ...: not applicable
Has self-employment earnings 9.1 Note ...: not applicable
Has investment income 44.6 Note ...: not applicable
Has capital gains 12.6 Note ...: not applicable
Has Old Age Security income 42.8 Note ...: not applicable
Has private pension income 38.9 Note ...: not applicable
Has taxable income 98.1 Note ...: not applicable
2012 constant dollars
Conditional earnings and income
Employment earnings 42,800 27,100
Self-employment earnings 28,100 10,100
Investment income 3,400 750
Capital gains 9,200 750
Old Age Security income 5,700 6,500
Private pension income 21,700 17,250
Taxable income 39,550 28,300
percent
Income-tax rates
Predicted marginal income tax rate 22.1 23.6
Predicted average income tax rate 11.4 13.2

The analysis centres on all Canadian taxfilers in the LAD, for the years from 2001 to 2012, who were 60 to 69 years of age in the reference year. This timeframe was chosen to provide a wide interval of observations for a comparative analysis over time, while centring the tax code reform from 2007 that introduced pension income splitting. This age group was chosen to focus on individuals who are both old enough to be collecting a pension, since this is a prerequisite for pension income splitting, and young enough to be employed, so that labour income responses to taxation are plausible. More precisely, the earliest age at which individuals can start to collect public pension income is 60, which serves as the benchmark for the lower bound of this target sample.Note 6 Individuals must start to receive income from their employer-sponsored RPP by the end of the year in which they turn age 69, which serves as the upper bound for this target sample.

5 Results

This section is organized as follows. First, an assessment is provided of how much individuals’ effective marginal tax rates actually change at the thresholds analyzed. The analysis centres on the lower bounds of the second, third and fourth federal income tax brackets, the lower bounds of the second and third provincial and territorial tax brackets, and the income thresholds at which OAS and EI benefits start being clawed back through recovery taxes.Note 7 The results are presented for the full period analyzed and separately for the periods preceding and following the introduction of pension income splitting. The analysis of bunching at the OAS recovery tax threshold is conditional on individuals aged 65 to 69 as a result of a benefit eligibility requirement for this program, and the analysis of bunching at the EI recovery tax threshold is conditional on individuals who are observed as receiving such benefits.Note 8

Second, the analysis of bunching responses to the convex kink points is presented, both as a graphical inspection and in an empirical density design. Third, how individuals’ bunching responses to taxes changed as a result of the pension income splitting reform is assessed. Fourth, the results from placebo tests are presented that consider how individuals known to be unaffected by the OAS and EI recovery taxes behave at these thresholds. The section concludes with a heterogeneity analysis.

5.1 Changes in effective marginal tax rates

The bunching analysis exploits convex kink points in individuals’ budget sets. As a result of tax progressivity, individuals’ marginal tax rates should increase discontinuously at the thresholds analyzed. As a result, consideration of how much variation is actually observed in individuals’ marginal tax rates at these thresholds is warranted. For example, Milligan (2009) showed that income tax schedules in Canada are complex functions of age, province or territory of residence, income sources, spousal characteristics, and other factors that may interact to attenuate the effects of changes in direct taxes on effective marginal tax rates.

To investigate this issue, Charts 1-1 and 1-2 show how individuals’ effective marginal tax rates change at the thresholds analyzed. Chart 1-1 looks at the pre-reform period, and Chart 1-2 looks at the post-reform period. The tax rates (shown on the vertical axes) are calculated using CTaCS (Milligan 2016), and the running variable (shown on the horizontal axes) is taxable income relative to the threshold, as calculated by CTaCS. For example, in Panel A, an individual with 0 relative income has taxable income equal to the lower bound of the second federal tax bracket. Each panel shows the average values of the effective marginal tax rates within $250 bins over the range of taxable income spanning $10,000 on either side of the threshold. Each panel also shows the predicted values from an ordinary least squares (OLS) regression of marginal tax rates on a sextic polynomial in taxable income relative to the threshold. Specifically, in each case, the following equation is estimated using OLS.

MT R it =α+ k=1 6 β k ( Y it T t ) k +γ1( Y it T t 0 )+ ε it,                                ( 1 ) MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacaWGnbGaamivaiaadkfapaWaaSbaaSqaa8qacaWGPbGaamiD aaWdaeqaaOWdbiabg2da9iabeg7aHjabgUcaRmaawahabeWcpaqaa8 qacaWGRbGaeyypa0JaaGymaaWdaeaapeGaaGOnaaqdpaqaa8qacqGH ris5aaGccqaHYoGypaWaaSbaaSqaa8qacaWGRbaapaqabaGcpeWaae Waa8aabaWdbiaadMfapaWaaSbaaSqaa8qacaWGPbGaamiDaaWdaeqa aOWdbiabgkHiTiaadsfapaWaaSbaaSqaa8qacaWG0baapaqabaaak8 qacaGLOaGaayzkaaWdamaaCaaaleqabaWdbiaadUgaaaGccqGHRaWk cqaHZoWzcaaIXaWaaeWaa8aabaWdbiaadMfapaWaaSbaaSqaa8qaca WGPbGaamiDaaWdaeqaaOWdbiabgkHiTiaadsfapaWaaSbaaSqaa8qa caWG0baapaqabaGcpeGaeyyzImRaaGimaaGaayjkaiaawMcaaiabgU caRiabew7aL9aadaWgaaWcbaWdbiaadMgacaWG0baapaqabaaaaa@6548@

where MT R it MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacaWGnbGaamivaiaadkfapaWaaSbaaSqaa8qacaWGPbGaamiD aaWdaeqaaaaa@3C84@ is the effective marginal tax rate of each individual i MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacaWGPbaaaa@38AF@ in year t MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacaWG0baaaa@38BA@ calculated using the CTaCS program; Y it MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacaWGzbWdamaaBaaaleaapeGaamyAaiaadshaa8aabeaaaaa@3AE0@ is the corresponding level of taxable income; T t MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacaWGubWdamaaBaaaleaapeGaamiDaaWdaeqaaaaa@39ED@ is the threshold for the particular convex kink point under analysis; 1( ) MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacaaIXaWaaeWaa8aabaGaeyyXICnapeGaayjkaiaawMcaaaaa @3C6E@ is an indicator function that takes the value of “1” if its argument is true and “0” otherwise; and ε it MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacqaH1oqzpaWaaSbaaSqaa8qacaWGPbGaamiDaaWdaeqaaaaa @3BA9@ is a statistical residual. The parameter γ MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaa aaa8qacqaHZoWzaaa@3968@ captures the increase in the marginal tax rate at the tax threshold. Using OLS to estimate Equation (1) for each threshold is equivalent to estimating the average changes in effective marginal tax rates in a parametric regression discontinuity (RD) design (Imbens and Lemieux 2007; Lee and Lemieux 2010). As expected, the effective marginal tax rates tend to increase meaningfully at each threshold, even after potential mitigating factors from other dimensions of the tax system have been taken into account.

Chart 1-1

Data table for Chart 1-1
Data table for Chart 1-1
Table summary
This table displays the results of Data table for Chart 1-1. The information is grouped by Bin (appearing as row headers), Panel A — Second federal tax, Panel B — Second provincial/territorial tax, Panel C — Third federal tax, Panel D — Third provincial/territorial tax, Panel E — Fourth federal tax, Panel F — Old Age Security recovery tax, Panel G — Employment Insurance recovery tax, Actual and Predicted, calculated using percent units of measure (appearing as column headers).
Bin Panel A — Second federal tax Panel B — Second provincial/territorial tax Panel C — Third federal tax Panel D — Third provincial/territorial tax Panel E — Fourth federal tax Panel F — Old Age Security recovery tax Panel G — Employment Insurance recovery tax
Actual Predicted Actual Predicted Actual Predicted Actual Predicted Actual Predicted Actual Predicted Actual Predicted
percent
-10,000 27.200 27.323 27.541 27.896 37.301 37.615 36.540 36.769 43.468 43.358 38.044 38.090 40.386 40.096
-9,750 27.291 27.268 27.576 27.541 37.176 37.305 36.487 36.565 42.964 43.106 38.152 38.030 40.115 40.039
-9,500 27.382 27.242 27.294 27.308 37.321 37.097 36.471 36.473 42.888 42.924 38.216 38.022 39.927 40.004
-9,250 27.464 27.239 27.479 27.166 37.319 36.973 36.833 36.469 42.874 42.795 38.062 38.045 39.978 39.983
-9,000 27.009 27.257 27.196 27.095 37.335 36.922 36.790 36.539 42.787 42.709 38.136 38.085 39.625 39.964
-8,750 27.358 27.291 27.433 27.074 37.098 36.928 37.059 36.665 42.768 42.655 38.136 38.128 39.717 39.939
-8,500 27.476 27.339 27.192 27.088 37.198 36.979 37.091 36.834 42.620 42.629 37.692 38.164 39.663 39.905
-8,250 27.304 27.398 27.145 27.124 36.946 37.068 36.919 37.038 42.361 42.623 38.015 38.188 40.083 39.862
-8,000 27.245 27.468 27.178 27.171 37.205 37.184 36.734 37.259 42.533 42.632 37.994 38.193 39.401 39.804
-7,750 27.303 27.546 27.611 27.222 37.088 37.318 36.969 37.494 42.605 42.651 38.212 38.176 40.026 39.737
-7,500 27.868 27.631 26.904 27.271 36.865 37.469 37.152 37.731 42.485 42.678 38.133 38.136 38.978 39.655
-7,250 27.900 27.722 27.106 27.312 37.109 37.627 37.500 37.968 42.940 42.709 38.068 38.071 39.582 39.571
-7,000 27.763 27.819 27.285 27.345 36.869 37.789 38.389 38.194 42.865 42.740 37.970 37.982 39.483 39.483
-6,750 27.934 27.921 27.266 27.367 37.039 37.956 38.762 38.406 42.826 42.771 37.548 37.872 39.488 39.390
-6,500 27.707 28.027 27.055 27.378 38.196 38.115 38.973 38.606 42.802 42.799 37.882 37.742 39.858 39.305
-6,250 27.988 28.138 27.163 27.379 39.235 38.273 39.115 38.783 43.299 42.825 37.589 37.592 39.757 39.225
-6,000 28.255 28.252 27.097 27.371 39.186 38.426 38.917 38.943 42.295 42.846 37.702 37.429 39.774 39.154
-5,750 28.473 28.371 27.246 27.357 38.926 38.571 39.314 39.078 43.199 42.863 37.605 37.257 39.220 39.093
-5,500 28.558 28.492 26.911 27.337 39.318 38.709 39.388 39.192 42.953 42.876 38.054 37.072 39.795 39.049
-5,250 28.867 28.618 26.990 27.315 39.314 38.835 39.409 39.286 42.887 42.884 37.264 36.892 39.337 39.022
-5,000 28.898 28.744 27.214 27.294 38.930 38.957 38.966 39.358 42.982 42.888 37.422 36.702 39.007 39.012
-4,750 29.070 28.875 27.257 27.276 39.134 39.069 39.559 39.410 42.071 42.887 37.020 36.519 38.676 39.022
-4,500 29.067 29.007 27.179 27.264 39.547 39.175 39.245 39.445 42.893 42.884 36.190 36.341 39.225 39.051
-4,250 29.073 29.142 27.688 27.260 39.185 39.272 39.761 39.463 43.184 42.876 35.311 36.167 39.178 39.097
-4,000 29.392 29.277 27.680 27.268 39.272 39.362 39.559 39.468 42.929 42.866 35.147 36.009 39.186 39.165
-3,750 29.725 29.412 27.680 27.289 39.270 39.447 39.432 39.461 42.527 42.854 35.325 35.862 38.441 39.246
-3,500 29.604 29.548 27.876 27.325 39.147 39.527 39.389 39.445 43.056 42.841 35.251 35.728 39.137 39.340
-3,250 29.652 29.683 27.986 27.377 39.550 39.600 39.295 39.422 42.408 42.826 35.399 35.610 39.468 39.444
-3,000 29.810 29.817 28.051 27.447 39.665 39.670 39.536 39.396 43.158 42.811 35.221 35.506 39.142 39.554
-2,750 29.541 29.947 27.936 27.536 39.604 39.735 39.112 39.370 42.959 42.796 35.320 35.420 38.551 39.675
-2,500 30.069 30.075 27.923 27.644 39.522 39.799 39.093 39.345 42.546 42.780 35.339 35.351 39.151 39.786
-2,250 29.916 30.200 27.944 27.772 39.765 39.859 39.282 39.324 42.991 42.766 34.960 35.297 39.445 39.896
-2,000 29.814 30.319 27.870 27.918 39.599 39.917 39.123 39.310 43.249 42.752 35.221 35.261 38.896 39.997
-1,750 30.239 30.433 28.059 28.082 39.328 39.975 39.045 39.305 42.505 42.740 34.963 35.238 38.667 40.079
-1,500 30.502 30.539 27.980 28.264 39.508 40.030 39.275 39.311 42.691 42.729 35.259 35.229 38.854 40.144
-1,250 30.496 30.639 28.142 28.462 39.443 40.084 39.414 39.330 42.915 42.718 35.363 35.233 38.635 40.183
-1,000 30.410 30.730 28.183 28.672 39.844 40.138 39.067 39.364 42.514 42.710 34.997 35.247 39.532 40.192
-750 30.571 30.812 28.136 28.899 41.537 40.190 39.261 39.414 42.450 42.702 35.340 35.270 41.796 40.166
-500 30.831 30.885 28.265 29.133 41.126 40.242 39.636 39.481 42.489 42.696 34.758 35.299 42.165 40.103
-250 32.309 30.947 29.905 29.377 40.464 40.293 40.469 39.566 42.863 42.691 37.383 35.335 43.690 39.997
0 37.448 37.794 33.097 33.468 43.590 44.531 42.167 41.867 45.639 45.593 44.545 44.323 57.744 56.195
250 37.952 37.889 33.265 33.739 44.113 44.606 42.480 41.998 45.920 45.610 44.664 44.395 57.448 56.086
500 38.015 37.916 33.550 33.990 44.298 44.652 42.607 42.138 45.539 45.608 44.551 44.434 55.896 55.833
750 38.121 37.931 33.593 34.243 46.301 44.698 42.556 42.294 45.147 45.605 45.086 44.471 55.669 55.533
1,000 38.269 37.934 33.844 34.489 46.283 44.742 42.540 42.470 45.356 45.603 44.988 44.504 55.550 55.178
1,250 38.151 37.925 34.126 34.730 45.332 44.785 42.465 42.660 46.146 45.601 44.600 44.532 54.909 54.761
1,500 38.233 37.904 35.421 34.959 44.642 44.825 42.395 42.867 45.511 45.598 44.373 44.555 54.919 54.319
1,750 38.278 37.870 35.780 35.180 44.731 44.862 42.543 43.085 45.236 45.595 44.489 44.571 54.742 53.797
2,000 37.916 37.826 36.063 35.388 44.974 44.897 42.198 43.314 45.544 45.591 44.608 44.580 53.779 53.233
2,250 37.675 37.771 36.098 35.581 44.919 44.929 42.829 43.550 46.246 45.587 44.603 44.583 50.714 52.626
2,500 37.658 37.706 36.642 35.757 44.406 44.957 44.589 43.796 45.637 45.581 43.975 44.579 49.543 51.946
2,750 37.456 37.632 36.753 35.917 44.481 44.983 43.804 44.039 45.243 45.575 44.366 44.569 49.750 51.307
3,000 37.191 37.550 36.757 36.058 44.899 45.005 43.476 44.287 46.120 45.568 44.119 44.555 47.877 50.594
3,250 37.088 37.462 36.826 36.182 44.733 45.024 43.954 44.530 45.537 45.559 44.440 44.538 48.485 49.881
3,500 36.999 37.368 36.696 36.287 44.897 45.040 44.713 44.773 45.415 45.550 43.988 44.519 48.750 49.099
3,750 36.960 37.270 36.295 36.375 45.007 45.053 45.118 44.998 45.517 45.540 44.174 44.502 47.535 48.352
4,000 36.993 37.171 36.302 36.445 44.503 45.063 46.799 45.217 45.246 45.530 44.012 44.488 48.320 47.628
4,250 36.913 37.070 36.147 36.500 44.835 45.071 46.821 45.419 45.244 45.520 44.427 44.480 46.235 46.854
4,500 36.850 36.970 35.924 36.540 44.838 45.077 45.828 45.605 45.616 45.509 44.383 44.481 46.429 46.164
4,750 36.732 36.874 36.076 36.567 45.183 45.081 45.734 45.768 45.293 45.499 44.524 44.494 45.921 45.477
5,000 36.780 36.781 36.182 36.583 45.228 45.084 45.894 45.911 45.345 45.490 44.414 44.523 46.506 44.844
5,250 36.741 36.694 36.373 36.591 45.228 45.087 46.496 46.029 45.316 45.482 44.216 44.571 45.056 44.261
5,500 36.786 36.615 36.362 36.592 45.420 45.089 46.675 46.118 45.975 45.475 44.292 44.641 43.393 43.717
5,750 36.742 36.544 36.554 36.591 45.113 45.093 45.823 46.181 45.455 45.470 44.341 44.732 44.690 43.238
6,000 36.724 36.483 36.491 36.588 45.064 45.097 45.839 46.214 45.485 45.467 44.848 44.850 42.511 42.829
6,250 36.484 36.433 36.451 36.588 45.331 45.104 45.911 46.219 45.438 45.466 45.202 45.000 43.621 42.491
6,500 36.547 36.394 36.323 36.591 45.352 45.113 45.344 46.198 45.602 45.467 46.317 45.178 44.829 42.221
6,750 36.504 36.368 36.498 36.602 45.078 45.124 45.945 46.148 45.534 45.470 45.885 45.379 42.561 42.029
7,000 36.631 36.352 36.268 36.621 44.991 45.138 45.799 46.078 45.840 45.475 46.264 45.611 41.884 41.901
7,250 36.608 36.347 36.549 36.649 45.714 45.156 45.666 45.986 45.199 45.482 46.640 45.874 42.035 41.835
7,500 36.368 36.352 36.971 36.687 45.317 45.175 45.357 45.881 45.731 45.489 47.176 46.148 40.720 41.814
7,750 36.349 36.363 37.158 36.736 45.214 45.198 45.950 45.766 45.604 45.496 47.083 46.441 41.221 41.826
8,000 36.374 36.379 37.118 36.793 45.119 45.223 45.827 45.652 45.344 45.501 46.970 46.753 41.685 41.847
8,250 36.263 36.396 37.136 36.856 45.015 45.248 45.780 45.546 45.417 45.503 46.654 47.050 41.875 41.850
8,500 36.179 36.408 37.167 36.921 44.872 45.272 45.635 45.460 44.791 45.500 46.545 47.335 41.635 41.808
8,750 36.190 36.410 36.978 36.982 45.410 45.294 45.858 45.407 45.567 45.487 46.800 47.585 39.800 41.667
9,000 36.326 36.394 37.105 37.030 45.319 45.310 45.518 45.402 45.679 45.464 46.674 47.783 41.261 41.372
9,250 36.165 36.353 36.968 37.057 45.097 45.317 45.670 45.462 45.692 45.424 47.100 47.901 39.738 40.876
9,500 36.146 36.275 36.968 37.048 45.380 45.311 45.742 45.610 45.462 45.363 46.875 47.914 39.842 40.175
9,750 36.236 36.150 36.762 36.989 45.310 45.287 45.985 45.854 45.320 45.274 48.443 47.783 39.003 39.049
10,000 36.244 35.962 36.852 36.861 45.327 45.239 45.689 46.241 44.884 45.154 48.844 47.483 39.160 37.444

Chart 1-2

Data table for Chart 1-2
Data table for Chart 1-2
Table summary
This table displays the results of Data table for Chart 1-2. The information is grouped by Bin (appearing as row headers), Panel A — Second federal tax, Panel B — Second provincial/territorial tax, Panel C — Third federal tax, Panel D — Third provincial/territorial tax, Panel E — Fourth federal tax, Panel F — Old Age Security recovery tax, Panel G — Employment Insurance recovery tax, Actual and Predicted, calculated using percent units of measure (appearing as column headers).
Bin Panel A — Second federal tax Panel B — Second provincial/territorial tax Panel C — Third federal tax Panel D — Third provincial/territorial tax Panel E — Fourth federal tax Panel F — Old Age Security recovery tax Panel G — Employment Insurance recovery tax
Actual Predicted Actual Predicted Actual Predicted Actual Predicted Actual Predicted Actual Predicted Actual Predicted
percent
-10,000 19.526 19.242 18.484 18.334 36.240 36.802 31.043 30.929 39.447 39.288 30.916 30.934 38.520 38.788
-9,750 19.582 19.429 18.313 18.502 36.174 36.282 31.126 30.935 38.928 39.078 30.710 30.756 38.794 38.878
-9,500 19.385 19.575 18.570 18.636 37.279 35.829 31.034 31.010 38.824 38.938 30.298 30.624 39.731 38.960
-9,250 19.341 19.689 19.012 18.740 35.575 35.428 31.333 31.140 38.567 38.850 31.116 30.527 39.376 39.027
-9,000 19.538 19.784 18.778 18.821 34.806 35.095 31.009 31.313 39.025 38.804 30.408 30.453 39.770 39.080
-8,750 19.698 19.866 18.625 18.883 34.182 34.816 30.872 31.521 38.826 38.789 30.566 30.396 38.187 39.118
-8,500 20.011 19.942 18.781 18.931 34.139 34.591 31.887 31.747 38.739 38.796 30.452 30.350 38.677 39.140
-8,250 20.287 20.022 19.177 18.967 34.091 34.422 31.546 32.000 39.082 38.818 30.239 30.310 38.482 39.147
-8,000 20.290 20.107 19.048 18.995 34.155 34.298 31.956 32.259 39.006 38.851 29.975 30.272 38.507 39.140
-7,750 20.256 20.201 18.864 19.018 34.352 34.219 31.887 32.524 38.876 38.888 30.049 30.234 38.572 39.123
-7,500 20.184 20.306 18.815 19.037 34.696 34.182 32.904 32.784 38.658 38.927 30.363 30.194 38.999 39.096
-7,250 20.316 20.422 19.431 19.056 34.865 34.180 33.876 33.044 39.314 38.964 29.826 30.151 40.710 39.062
-7,000 20.387 20.551 19.136 19.076 34.533 34.211 33.875 33.294 39.312 38.998 29.819 30.104 39.873 39.026
-6,750 20.780 20.691 18.969 19.097 34.835 34.271 34.012 33.533 38.691 39.026 30.094 30.053 38.558 38.986
-6,500 20.921 20.846 18.999 19.122 34.148 34.353 33.544 33.757 39.074 39.049 29.860 29.998 38.382 38.947
-6,250 21.224 21.010 20.014 19.151 34.512 34.457 34.451 33.970 39.019 39.066 30.208 29.943 39.071 38.909
-6,000 21.137 21.184 19.309 19.184 34.213 34.579 35.757 34.162 38.743 39.075 29.967 29.884 40.106 38.877
-5,750 21.273 21.366 18.901 19.223 34.483 34.709 35.430 34.338 38.918 39.080 29.855 29.826 39.296 38.849
-5,500 21.603 21.553 19.048 19.267 34.635 34.850 34.149 34.498 39.047 39.078 30.354 29.768 38.317 38.828
-5,250 21.746 21.746 19.089 19.318 34.438 34.998 34.104 34.638 38.911 39.071 29.668 29.713 38.346 38.814
-5,000 22.136 21.938 19.181 19.375 34.510 35.145 33.969 34.760 39.034 39.061 29.626 29.660 39.286 38.807
-4,750 22.683 22.132 19.100 19.439 34.713 35.296 33.834 34.865 39.078 39.047 29.354 29.613 39.216 38.808
-4,500 22.611 22.328 19.327 19.508 34.832 35.442 34.164 34.952 39.107 39.031 29.666 29.571 39.285 38.816
-4,250 22.382 22.518 20.142 19.584 34.653 35.585 34.219 35.023 38.898 39.013 29.642 29.536 38.423 38.831
-4,000 22.709 22.704 19.637 19.666 36.729 35.721 33.976 35.078 38.863 38.996 29.734 29.509 38.480 38.850
-3,750 23.351 22.883 19.658 19.755 37.180 35.847 34.760 35.118 39.568 38.979 29.501 29.490 38.601 38.872
-3,500 23.219 23.055 19.612 19.850 37.315 35.966 36.320 35.145 38.793 38.962 29.748 29.481 38.149 38.897
-3,250 23.022 23.220 19.900 19.950 35.991 36.075 35.988 35.159 39.354 38.948 29.332 29.482 39.419 38.920
-3,000 23.086 23.374 20.435 20.054 35.766 36.173 34.232 35.162 39.060 38.937 29.805 29.492 38.918 38.941
-2,750 23.209 23.518 20.294 20.166 35.935 36.260 34.016 35.155 38.982 38.928 29.386 29.512 38.165 38.956
-2,500 23.047 23.652 20.366 20.282 37.236 36.336 33.956 35.139 38.797 38.923 29.480 29.542 37.887 38.963
-2,250 22.856 23.776 20.494 20.404 37.666 36.402 36.659 35.116 38.445 38.921 29.292 29.581 39.288 38.958
-2,000 23.217 23.888 20.232 20.531 37.056 36.457 36.028 35.085 38.950 38.923 29.750 29.630 38.819 38.938
-1,750 23.628 23.989 20.703 20.659 36.117 36.501 37.290 35.051 39.421 38.929 29.370 29.688 39.640 38.903
-1,500 23.882 24.081 20.792 20.795 36.261 36.537 35.556 35.012 39.044 38.939 29.383 29.754 37.943 38.847
-1,250 24.216 24.162 20.933 20.935 36.008 36.564 34.382 34.971 38.652 38.951 29.341 29.828 37.475 38.765
-1,000 24.133 24.234 21.522 21.078 36.186 36.584 33.871 34.929 38.678 38.967 29.521 29.908 37.948 38.664
-750 24.189 24.298 21.419 21.225 35.930 36.597 34.149 34.886 38.987 38.986 29.023 29.992 37.523 38.526
-500 24.004 24.354 21.033 21.377 36.145 36.606 33.879 34.846 38.956 39.006 29.024 30.082 37.168 38.366
-250 25.756 24.411 21.337 21.539 36.586 36.610 36.393 34.805 39.147 39.028 32.021 30.188 43.169 38.152
0 29.469 29.716 24.146 24.646 39.627 40.265 37.674 37.319 42.043 41.685 38.083 38.097 56.756 55.634
250 30.292 29.855 25.180 24.836 39.783 40.296 38.025 37.306 41.971 41.729 38.580 38.274 56.237 55.446
500 30.337 29.891 25.528 24.998 40.081 40.295 37.175 37.279 41.325 41.752 38.667 38.374 55.631 55.139
750 30.461 29.925 25.347 25.166 40.232 40.295 36.474 37.258 41.662 41.775 38.687 38.469 55.276 54.804
1,000 30.369 29.958 25.618 25.334 40.225 40.297 39.092 37.245 41.248 41.795 38.434 38.566 54.683 54.427
1,250 30.267 29.990 25.227 25.506 40.552 40.301 38.526 37.239 41.864 41.813 38.614 38.661 53.498 54.014
1,500 30.008 30.022 25.026 25.679 40.902 40.308 36.851 37.241 41.983 41.828 38.719 38.753 52.874 53.568
1,750 30.088 30.056 25.807 25.852 40.754 40.319 36.383 37.253 42.100 41.841 39.030 38.842 52.640 53.104
2,000 30.222 30.092 25.717 26.029 40.465 40.335 36.909 37.275 42.372 41.850 38.508 38.929 51.421 52.588
2,250 29.919 30.131 26.826 26.210 40.659 40.355 37.004 37.306 41.259 41.856 39.323 39.011 51.642 52.068
2,500 30.058 30.173 26.795 26.383 40.259 40.380 36.381 37.350 41.656 41.858 40.423 39.090 51.314 51.504
2,750 30.132 30.218 26.502 26.561 40.882 40.410 36.398 37.404 41.391 41.856 38.665 39.165 49.593 50.926
3,000 30.009 30.267 26.440 26.739 40.198 40.445 36.650 37.471 42.418 41.850 39.084 39.236 50.279 50.325
3,250 30.160 30.319 26.232 26.916 40.536 40.482 36.704 37.549 42.012 41.841 38.561 39.304 49.562 49.719
3,500 30.126 30.374 26.203 27.095 40.729 40.524 37.428 37.641 41.554 41.828 38.418 39.371 49.248 49.110
3,750 29.999 30.431 27.007 27.263 40.529 40.568 37.651 37.745 41.723 41.813 38.341 39.435 48.775 48.496
4,000 29.990 30.489 27.888 27.438 40.731 40.613 37.826 37.860 41.694 41.795 37.735 39.497 48.448 47.912
4,250 29.982 30.549 28.009 27.608 40.636 40.658 38.071 37.991 42.146 41.776 40.075 39.559 47.451 47.333
4,500 29.906 30.609 28.154 27.774 40.833 40.704 38.417 38.131 42.029 41.755 40.976 39.619 45.785 46.762
4,750 29.807 30.667 28.254 27.937 40.947 40.746 38.879 38.283 41.829 41.735 39.637 39.681 45.581 46.193
5,000 29.959 30.723 28.231 28.094 40.488 40.785 39.203 38.449 42.132 41.715 38.975 39.743 45.651 45.666
5,250 32.002 30.773 28.407 28.250 41.083 40.819 39.191 38.624 41.747 41.697 41.342 39.807 44.544 45.191
5,500 31.466 30.819 28.554 28.399 40.858 40.847 39.569 38.811 41.634 41.681 42.100 39.871 45.371 44.760
5,750 30.518 30.857 28.880 28.540 40.900 40.868 39.535 39.006 41.403 41.669 40.679 39.937 44.751 44.351
6,000 29.905 30.886 28.856 28.676 40.583 40.879 39.608 39.210 41.380 41.660 40.024 40.005 45.180 43.997
6,250 30.803 30.905 28.814 28.806 40.551 40.881 39.394 39.418 41.813 41.656 38.480 40.073 43.354 43.692
6,500 31.461 30.912 28.831 28.928 40.812 40.872 39.603 39.633 41.462 41.657 38.820 40.138 43.184 43.432
6,750 31.650 30.907 28.827 29.043 40.704 40.854 39.533 39.851 41.489 41.663 39.031 40.200 43.919 43.229
7,000 31.978 30.888 28.897 29.151 40.572 40.824 39.574 40.064 40.931 41.674 38.742 40.255 44.051 43.070
7,250 33.134 30.855 28.941 29.251 40.603 40.786 39.695 40.277 41.999 41.689 42.249 40.300 43.641 42.951
7,500 31.973 30.809 28.903 29.345 40.661 40.738 40.331 40.487 41.997 41.707 41.263 40.330 42.860 42.865
7,750 30.246 30.749 29.280 29.431 40.588 40.686 40.877 40.681 41.462 41.727 41.181 40.339 43.051 42.808
8,000 29.739 30.677 29.440 29.512 40.775 40.631 40.708 40.860 42.007 41.746 39.693 40.320 43.023 42.758
8,250 29.978 30.594 29.248 29.586 40.562 40.577 41.142 41.022 41.408 41.762 39.989 40.264 42.804 42.703
8,500 29.885 30.505 29.311 29.657 40.740 40.530 40.806 41.159 42.531 41.769 41.218 40.159 41.376 42.619
8,750 29.925 30.412 30.209 29.725 40.742 40.496 41.415 41.262 42.105 41.764 40.551 39.994 40.905 42.482
9,000 29.890 30.321 30.969 29.791 40.816 40.484 41.451 41.327 41.193 41.740 39.076 39.752 42.466 42.268
9,250 29.741 30.239 30.827 29.859 40.728 40.504 41.341 41.343 42.212 41.692 38.560 39.421 41.156 41.934
9,500 29.984 30.174 29.235 29.930 40.662 40.568 40.875 41.304 41.067 41.607 38.635 38.990 41.010 41.442
9,750 29.865 30.137 29.285 30.008 40.643 40.686 41.478 41.197 41.012 41.477 38.186 38.410 41.835 40.719
10,000 31.344 30.137 30.185 30.096 40.425 40.880 41.205 41.015 41.795 41.293 38.343 37.661 40.079 39.787

The charts also show that effective marginal tax rates increase from the second to the third tax bracket and from the third to the fourth tax bracket as a result of tax progressivity. This is consistent with expectations. The rate increases at the recovery tax thresholds for OAS, and EI benefits are comparatively large, since these programs claw back benefits at high rates of up to 15% (OAS) and 30% (EI). Lastly, as expected, a comparison of the two charts suggests that the rate changes are similar in each period.

The OLS regression estimates of the parameter γ MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqr1ngB PrgifHhDYfgasaacH8YjY=vipgYlh9vqqj=hEeeu0xXdbba9frFj0= OqFfea0dXdd9vqai=hGuQ8kuc9pgc9q8qqaq=dir=f0=yqaiVgFr0x fr=xfr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaacbiaeaa aaaaaaa8qacaWFZoaaaa@3903@ from Equation (1) are presented in Table 2, by period and separately for each year; the standard errors in this analysis are clustered by individual. The size of each estimate varies over time in the yearly analysis. This likely stems from the relatively small sample sizes in these cases. On balance, the estimates match expectations. For example, marginal tax rates are known to have increased from one bracket to the next by 6% to 7% at the lower bounds of the second federal tax bracket, 4% at the lower bounds of the third and 3% at the lower bounds of the fourth. The RD estimates of the changes in effective marginal tax rates are 6.097% for the second bracket, 3.893% for the third and 2.652% for the fourth.

Table 2
Regression estimates of discontinuities in marginal tax rates at the thresholds, 2001 to 2012
Table summary
This table displays the results of Regression estimates of discontinuities in marginal tax rates at the thresholds Direct tax thresholds, Indirect tax thresholds, Second federal tax, Second provincial/ territorial tax, Third federal tax, Third provincial/ territorial tax, Fourth federal tax, Old Age Security recovery tax and Employment Insurance recovery tax, calculated using percent units of measure (appearing as column headers).
Direct tax thresholds Indirect tax thresholds
Second federal tax Second provincial/ territorial tax Third federal tax Third provincial/ territorial tax Fourth federal tax Old Age Security recovery tax Employment Insurance recovery tax
percent
By time period
2001 to 2012 6.097Note *** 3.430Note *** 3.893Note *** 2.475Note *** 2.652Note *** 8.434Note *** 17.340Note ***
2001 to 2006 6.853Note *** 3.861Note *** 4.213Note *** 2.206Note *** 2.927Note *** 8.983Note *** 16.440Note ***
2007 to 2012 5.369Note *** 2.987Note *** 3.685Note *** 2.567Note *** 2.656Note *** 7.907Note *** 17.770Note ***
By year
2001 6.937Note *** 6.849Note *** 4.753Note *** 3.636Note *** 2.534Note *** 9.395Note *** 19.450Note ***
2002 6.927Note *** 5.731Note *** 4.411Note *** 3.031Note *** 2.516Note *** 9.125Note *** 19.160Note ***
2003 6.598Note *** 5.541Note *** 4.696Note *** 2.930Note *** 2.714Note *** 9.133Note *** 18.010Note ***
2004 5.256Note *** 1.959Note *** 4.735Note *** 1.960Note *** 3.140Note *** 9.159Note *** 15.570Note ***
2005 7.865Note *** 1.525Note *** 7.704Note *** 0.830Note ** 3.008Note *** 8.521Note *** 13.870Note ***
2006 7.547Note *** 2.104Note *** -0.689 1.682Note *** 2.840Note *** 9.296Note *** 15.090Note ***
2007 5.552Note *** 3.460Note *** 3.375Note *** 4.531Note *** 2.461Note ** 8.044Note *** 17.120Note ***
2008 4.461Note *** 5.500Note *** 6.411Note *** 5.838Note *** 2.665Note *** 9.849Note *** 17.540Note ***
2009 5.919Note *** 3.332Note *** 3.996Note *** -0.561 2.777Note *** 7.790Note *** 18.830Note ***
2010 6.063Note *** 2.763Note *** 1.876Note *** 0.691Note * 2.990Note *** 8.256Note *** 17.800Note ***
2011 5.866Note *** 1.875Note *** 3.094Note *** 3.973Note *** 2.921Note *** 6.810Note *** 16.950Note ***
2012 4.353Note *** 0.606Note ** 3.288Note *** 0.914Note ** 2.190Note *** 7.218Note *** 18.000Note ***

5.2 Bunching analysis

Graphical inspections of bunching at the tax thresholds are shown in Charts 2-1 and 2-2. Chart 2-1 looks at data from the pre-reform period, and Chart 2-2 looks at the post-reform period. Each panel shows the distribution of taxable income relative to the relevant tax threshold over an interval spanning $10,000 on either side of that threshold. Each dot shows the percentage of individuals in the sample with taxable incomes within a bin of width $250.Note 9 In addition, each panel shows the estimated counterfactual distribution based on the procedure of Chetty et al. (2011).Note 10 This analysis appears to show that individuals are somewhat responsive to the discontinuous increases in their marginal tax rates in both periods, where spikes in the distributions of taxable income are observed at most tax thresholds.

Chart 2-1

Data table for Chart 2-1
Data table for Chart 2-1
Table summary
This table displays the results of Data table for Chart 2-1. The information is grouped by Bin (appearing as row headers), Panel A — Second federal tax, Panel B — Second provincial/territorial tax, Panel C — Third federal tax, Panel D — Third provincial/territorial tax, Panel E — Fourth federal tax, Panel F —Old Age Security recovery tax, Panel G — Employment Insurance recovery tax, Actual and Predicted, calculated using percent units of measure (appearing as column headers).
Bin Panel A — Second federal tax Panel B — Second provincial/territorial tax Panel C — Third federal tax Panel D — Third provincial/territorial tax Panel E — Fourth federal tax Panel F —Old Age Security recovery tax Panel G — Employment Insurance recovery tax
Actual Predicted Actual Predicted Actual Predicted Actual Predicted Actual Predicted Actual Predicted Actual Predicted
percent
-10,000 1.546 1.524 1.487 1.476 2.022 2.031 2.062 2.095 1.587 1.654 2.023 1.987 2.111 2.157
-9,750 1.512 1.525 1.464 1.477 2.001 2.020 2.114 2.074 1.715 1.628 1.991 1.968 2.040 2.083
-9,500 1.502 1.525 1.474 1.477 2.043 2.006 2.077 2.053 1.574 1.607 1.919 1.946 2.167 2.025
-9,250 1.516 1.523 1.473 1.475 2.018 1.991 2.067 2.031 1.653 1.591 1.873 1.921 2.004 1.979
-9,000 1.532 1.520 1.477 1.473 1.975 1.973 1.940 2.008 1.623 1.579 1.905 1.895 1.847 1.941
-8,750 1.514 1.517 1.475 1.470 1.946 1.954 1.956 1.984 1.397 1.568 1.835 1.867 1.949 1.911
-8,500 1.530 1.513 1.474 1.466 1.929 1.934 1.958 1.960 1.631 1.560 1.812 1.838 1.878 1.885
-8,250 1.509 1.509 1.458 1.461 1.865 1.913 1.940 1.935 1.680 1.553 1.772 1.809 2.004 1.862
-8,000 1.497 1.504 1.445 1.456 1.904 1.890 1.900 1.910 1.494 1.547 1.791 1.781 1.756 1.841
-7,750 1.517 1.499 1.435 1.451 1.800 1.867 1.902 1.884 1.490 1.540 1.815 1.752 1.756 1.821
-7,500 1.470 1.494 1.452 1.446 1.885 1.844 1.871 1.858 1.415 1.534 1.732 1.725 1.746 1.801
-7,250 1.490 1.489 1.450 1.441 1.861 1.820 1.864 1.831 1.521 1.527 1.699 1.698 1.730 1.780
-7,000 1.504 1.484 1.419 1.436 1.779 1.795 1.823 1.804 1.525 1.520 1.689 1.672 1.822 1.759
-6,750 1.476 1.480 1.452 1.431 1.743 1.771 1.725 1.777 1.525 1.512 1.659 1.648 1.725 1.737
-6,500 1.476 1.475 1.431 1.426 1.737 1.746 1.761 1.750 1.583 1.503 1.706 1.625 1.675 1.714
-6,250 1.457 1.470 1.420 1.421 1.742 1.721 1.739 1.723 1.485 1.494 1.603 1.603 1.725 1.689
-6,000 1.477 1.465 1.431 1.417 1.768 1.696 1.672 1.696 1.565 1.483 1.552 1.582 1.527 1.664
-5,750 1.452 1.461 1.417 1.412 1.680 1.672 1.677 1.669 1.450 1.472 1.573 1.563 1.766 1.639
-5,500 1.434 1.456 1.399 1.408 1.634 1.647 1.653 1.643 1.371 1.460 1.493 1.545 1.690 1.612
-5,250 1.472 1.451 1.387 1.404 1.634 1.623 1.591 1.616 1.614 1.447 1.513 1.528 1.649 1.586
-5,000 1.447 1.446 1.416 1.400 1.601 1.598 1.538 1.590 1.472 1.434 1.584 1.512 1.502 1.560
-4,750 1.474 1.441 1.397 1.397 1.602 1.574 1.612 1.565 1.415 1.420 1.575 1.497 1.507 1.534
-4,500 1.432 1.436 1.402 1.393 1.510 1.550 1.582 1.539 1.260 1.406 1.440 1.483 1.502 1.509
-4,250 1.433 1.430 1.388 1.390 1.516 1.527 1.560 1.515 1.313 1.391 1.395 1.470 1.467 1.485
-4,000 1.415 1.424 1.380 1.386 1.472 1.503 1.434 1.490 1.393 1.376 1.443 1.457 1.538 1.461
-3,750 1.412 1.418 1.384 1.383 1.429 1.480 1.415 1.467 1.357 1.362 1.393 1.445 1.441 1.440
-3,500 1.371 1.412 1.385 1.379 1.444 1.457 1.431 1.444 1.397 1.347 1.416 1.434 1.467 1.419
-3,250 1.405 1.405 1.363 1.376 1.422 1.435 1.426 1.421 1.260 1.333 1.391 1.422 1.426 1.401
-3,000 1.402 1.398 1.352 1.372 1.421 1.412 1.433 1.399 1.317 1.318 1.332 1.411 1.426 1.384
-2,750 1.369 1.390 1.381 1.368 1.435 1.390 1.437 1.378 1.371 1.304 1.417 1.401 1.365 1.368
-2,500 1.379 1.382 1.354 1.363 1.402 1.368 1.351 1.357 1.309 1.291 1.446 1.390 1.289 1.355
-2,250 1.385 1.373 1.351 1.359 1.370 1.347 1.311 1.337 1.260 1.278 1.394 1.379 1.294 1.343
-2,000 1.356 1.364 1.351 1.354 1.315 1.325 1.312 1.317 1.335 1.265 1.382 1.368 1.253 1.332
-1,750 1.391 1.355 1.356 1.349 1.274 1.304 1.314 1.298 1.300 1.254 1.416 1.357 1.238 1.323
-1,500 1.349 1.345 1.344 1.343 1.308 1.284 1.242 1.279 1.141 1.242 1.310 1.345 1.411 1.315
-1,250 1.346 1.334 1.341 1.337 1.247 1.263 1.241 1.260 1.238 1.232 1.340 1.333 1.208 1.309
-1,000 1.337 1.323 1.344 1.330 1.279 1.243 1.242 1.242 1.322 1.222 1.377 1.321 1.421 1.303
-750 1.352 1.312 1.347 1.323 1.243 1.223 1.276 1.225 1.340 1.213 1.365 1.308 1.071 1.297
-500 1.343 1.301 1.355 1.315 1.266 1.203 1.207 1.208 1.278 1.204 1.355 1.294 1.208 1.292
-250 1.465 1.289 1.369 1.307 1.290 1.184 1.168 1.190 1.331 1.196 1.579 1.280 1.264 1.287
0 1.336 1.276 1.322 1.298 1.217 1.165 1.143 1.174 1.388 1.189 1.377 1.266 1.548 1.282
250 1.264 1.264 1.297 1.289 1.172 1.146 1.164 1.157 1.172 1.182 1.377 1.251 1.512 1.276
500 1.250 1.251 1.289 1.279 1.109 1.127 1.141 1.140 1.132 1.176 1.269 1.235 1.426 1.269
750 1.232 1.238 1.277 1.268 1.093 1.109 1.163 1.124 1.172 1.170 1.306 1.219 1.380 1.261
1,000 1.211 1.225 1.245 1.257 1.079 1.091 1.136 1.108 1.070 1.164 1.229 1.202 1.208 1.251
1,250 1.198 1.211 1.257 1.246 1.049 1.073 1.100 1.091 1.132 1.159 1.157 1.184 1.314 1.241
1,500 1.192 1.198 1.256 1.234 1.077 1.056 1.073 1.075 1.163 1.154 1.115 1.166 1.208 1.228
1,750 1.168 1.185 1.182 1.222 1.018 1.039 1.028 1.059 1.203 1.149 1.037 1.148 1.274 1.213
2,000 1.133 1.171 1.201 1.209 1.035 1.022 1.022 1.042 1.176 1.144 1.097 1.129 1.106 1.196
2,250 1.156 1.158 1.174 1.196 0.980 1.006 1.032 1.026 1.167 1.139 1.072 1.110 1.101 1.177
2,500 1.134 1.145 1.201 1.183 0.987 0.989 0.980 1.009 1.074 1.134 1.063 1.090 1.116 1.156
2,750 1.127 1.132 1.160 1.170 0.946 0.973 0.968 0.993 0.964 1.128 0.983 1.070 1.091 1.133
3,000 1.112 1.119 1.148 1.156 0.951 0.958 1.028 0.976 1.203 1.123 1.055 1.050 1.111 1.107
3,250 1.079 1.106 1.153 1.143 0.939 0.943 0.986 0.959 0.986 1.117 0.966 1.030 0.908 1.080
3,500 1.067 1.094 1.108 1.129 0.897 0.927 0.921 0.942 1.030 1.111 0.997 1.010 1.076 1.051
3,750 1.080 1.082 1.101 1.116 0.939 0.913 0.887 0.925 1.048 1.105 0.898 0.990 1.005 1.020
4,000 1.063 1.070 1.076 1.103 0.890 0.898 0.898 0.908 1.074 1.098 0.904 0.969 0.913 0.987
4,250 1.044 1.059 1.076 1.090 0.861 0.884 0.907 0.891 1.172 1.091 0.972 0.949 0.939 0.954
4,500 1.052 1.048 1.074 1.077 0.857 0.870 0.873 0.874 1.220 1.083 0.863 0.929 0.974 0.919
4,750 1.027 1.037 1.061 1.064 0.841 0.857 0.872 0.858 1.070 1.075 0.905 0.909 0.812 0.885
5,000 1.022 1.026 1.039 1.053 0.813 0.843 0.833 0.841 0.933 1.066 0.900 0.890 0.898 0.850
5,250 1.000 1.016 1.039 1.041 0.858 0.830 0.795 0.825 1.127 1.057 0.844 0.871 0.822 0.816
5,500 1.020 1.006 1.013 1.030 0.797 0.817 0.811 0.808 1.039 1.048 0.846 0.852 0.721 0.783
5,750 0.985 0.997 1.028 1.020 0.789 0.805 0.798 0.793 0.955 1.039 0.862 0.833 0.670 0.752
6,000 0.979 0.987 1.018 1.010 0.773 0.793 0.798 0.777 0.990 1.029 0.777 0.816 0.746 0.722
6,250 0.978 0.978 0.973 1.000 0.758 0.781 0.765 0.762 1.074 1.019 0.794 0.798 0.710 0.695
6,500 0.960 0.969 0.995 0.992 0.780 0.769 0.767 0.748 1.119 1.009 0.808 0.781 0.675 0.670
6,750 0.942 0.960 0.994 0.983 0.732 0.758 0.722 0.734 0.844 0.999 0.695 0.765 0.579 0.648
7,000 0.945 0.952 0.975 0.976 0.742 0.747 0.714 0.721 0.858 0.989 0.708 0.750 0.634 0.629
7,250 0.934 0.943 0.962 0.968 0.773 0.736 0.718 0.708 0.893 0.979 0.721 0.735 0.650 0.614
7,500 0.905 0.933 0.958 0.961 0.698 0.726 0.682 0.696 1.017 0.969 0.690 0.721 0.655 0.601
7,750 0.912 0.924 0.954 0.954 0.722 0.716 0.684 0.685 1.026 0.960 0.698 0.707 0.604 0.592
8,000 0.907 0.915 0.963 0.947 0.702 0.706 0.661 0.675 0.911 0.952 0.698 0.694 0.411 0.585
8,250 0.902 0.904 0.919 0.940 0.698 0.697 0.672 0.665 0.915 0.944 0.686 0.682 0.609 0.580
8,500 0.879 0.894 0.903 0.932 0.714 0.689 0.655 0.656 0.937 0.937 0.665 0.670 0.594 0.576
8,750 0.877 0.883 0.926 0.923 0.645 0.681 0.634 0.648 1.008 0.930 0.618 0.660 0.497 0.571
9,000 0.866 0.871 0.904 0.914 0.655 0.674 0.655 0.640 0.800 0.925 0.621 0.649 0.604 0.565
9,250 0.852 0.858 0.885 0.902 0.639 0.667 0.616 0.633 0.928 0.920 0.595 0.640 0.523 0.555
9,500 0.850 0.844 0.888 0.889 0.648 0.662 0.644 0.627 0.911 0.917 0.581 0.631 0.563 0.539
9,750 0.816 0.830 0.870 0.873 0.647 0.657 0.624 0.620 0.915 0.914 0.611 0.623 0.462 0.515
10,000 0.802 0.814 0.855 0.854 0.668 0.654 0.605 0.613 0.880 0.913 0.638 0.616 0.487 0.477

Chart 2-2

Data table for Chart 2-2
Data table for Chart 2-2
Table summary
This table displays the results of Data table for Chart 2-2. The information is grouped by Bin (appearing as row headers), Panel A — Second federal tax, Panel B — Second provincial/territorial tax, Panel C — Third federal tax, Panel D — Third provincial/territorial tax, Panel E — Fourth federal tax, Panel F —Old Age Security recovery tax, Panel G — Employment Insurance recovery tax, Actual and Predicted, calculated using percent units of measure (appearing as column headers).
Bin Panel A — Second federal tax Panel B — Second provincial/territorial tax Panel C — Third federal tax Panel D — Third provincial/territorial tax Panel E — Fourth federal tax Panel F —Old Age Security recovery tax Panel G — Employment Insurance recovery tax
Actual Predicted Actual Predicted Actual Predicted Actual Predicted Actual Predicted Actual Predicted Actual Predicted
percent
-10,000 1.460 1.445 1.281 1.329 2.027 2.010 1.905 1.736 1.531 1.496 1.675 1.688 2.051 2.056
-9,750 1.465 1.491 1.276 1.276 1.935 1.920 1.817 1.833 1.451 1.477 1.681 1.683 2.051 2.015
-9,500 1.444 1.526 1.266 1.245 1.891 1.847 1.782 1.901 1.484 1.462 1.720 1.674 1.993 1.980
-9,250 1.441 1.550 1.260 1.229 1.715 1.789 1.839 1.943 1.386 1.448 1.678 1.661 2.001 1.950
-9,000 1.700 1.566 1.255 1.226 1.695 1.743 1.804 1.966 1.451 1.437 1.577 1.644 1.830 1.924
-8,750 1.792 1.575 1.268 1.232 1.675 1.706 1.908 1.971 1.392 1.427 1.657 1.625 1.766 1.899
-8,500 1.872 1.578 1.249 1.244 1.627 1.678 2.008 1.962 1.442 1.418 1.627 1.605 1.862 1.876
-8,250 1.431 1.577 1.266 1.260 1.647 1.656 1.964 1.943 1.481 1.411 1.574 1.584 1.937 1.854
-8,000 1.417 1.573 1.303 1.278 1.675 1.639 2.044 1.916 1.274 1.404 1.519 1.563 1.905 1.831
-7,750 1.427 1.566 1.261 1.296 1.777 1.625 1.931 1.882 1.469 1.397 1.560 1.542 1.798 1.809
-7,500 1.432 1.557 1.266 1.314 1.725 1.614 2.321 1.844 1.427 1.391 1.478 1.521 1.878 1.785
-7,250 1.424 1.546 1.266 1.330 1.575 1.604 1.690 1.802 1.339 1.385 1.445 1.501 1.731 1.762
-7,000 1.466 1.534 1.265 1.344 1.580 1.596 1.691 1.760 1.478 1.379 1.485 1.482 1.651 1.737
-6,750 1.615 1.522 1.274 1.356 1.571 1.587 1.622 1.717 1.365 1.374 1.503 1.464 1.702 1.712
-6,500 1.625 1.510 1.291 1.365 1.523 1.579 1.617 1.674 1.324 1.369 1.472 1.448 1.779 1.686
-6,250 1.451 1.497 1.804 1.371 1.571 1.571 1.781 1.632 1.377 1.364 1.424 1.434 1.726 1.661
-6,000 1.418 1.485 1.368 1.375 1.517 1.562 1.489 1.592 1.289 1.359 1.470 1.421 1.510 1.634
-5,750 1.638 1.473 1.290 1.377 1.493 1.552 1.440 1.553 1.339 1.354 1.437 1.409 1.584 1.608
-5,500 1.457 1.461 1.282 1.376 1.516 1.541 1.449 1.517 1.419 1.350 1.414 1.400 1.523 1.583
-5,250 1.557 1.450 1.328 1.374 1.533 1.529 1.451 1.484 1.286 1.345 1.421 1.392 1.619 1.557
-5,000 1.593 1.439 1.367 1.370 1.511 1.516 1.384 1.452 1.448 1.341 1.404 1.385 1.587 1.532
-4,750 1.506 1.429 1.475 1.365 1.462 1.502 1.450 1.424 1.327 1.338 1.378 1.380 1.462 1.509
-4,500 1.384 1.419 1.371 1.359 1.507 1.488 1.351 1.397 1.318 1.334 1.376 1.376 1.518 1.486
-4,250 1.353 1.409 1.302 1.354 1.452 1.473 1.327 1.373 1.374 1.331 1.343 1.373 1.462 1.464
-4,000 1.471 1.400 1.289 1.348 1.684 1.457 1.393 1.351 1.268 1.328 1.332 1.371 1.382 1.444
-3,750 1.364 1.391 1.297 1.342 1.419 1.440 1.500 1.332 1.389 1.325 1.380 1.370 1.467 1.425
-3,500 1.281 1.382 1.359 1.338 1.447 1.424 1.234 1.314 1.289 1.323 1.358 1.370 1.419 1.407
-3,250 1.294 1.373 1.515 1.334 1.367 1.407 1.269 1.297 1.232 1.321 1.361 1.370 1.491 1.391
-3,000 1.329 1.364 1.321 1.331 1.361 1.389 1.256 1.282 1.294 1.319 1.382 1.370 1.283 1.376
-2,750 1.236 1.356 1.286 1.330 1.390 1.372 1.270 1.269 1.271 1.318 1.332 1.371 1.443 1.362
-2,500 1.238 1.347 1.290 1.329 1.405 1.355 1.282 1.256 1.294 1.316 1.367 1.372 1.384 1.350
-2,250 1.286 1.339 1.268 1.331 1.318 1.338 1.378 1.244 1.362 1.315 1.363 1.372 1.368 1.339
-2,000 1.520 1.330 1.471 1.333 1.286 1.321 1.269 1.233 1.321 1.313 1.343 1.373 1.251 1.329
-1,750 1.335 1.321 1.286 1.337 1.214 1.305 1.321 1.223 1.345 1.312 1.366 1.373 1.259 1.320
-1,500 1.260 1.312 1.321 1.342 1.290 1.288 1.190 1.212 1.371 1.310 1.319 1.372 1.187 1.311
-1,250 1.334 1.303 1.497 1.348 1.254 1.273 1.132 1.202 1.303 1.308 1.388 1.371 1.256 1.303
-1,000 1.284 1.294 1.437 1.354 1.316 1.257 1.168 1.193 1.250 1.306 1.388 1.368 1.251 1.296
-750 1.317 1.285 1.313 1.362 1.280 1.243 1.222 1.183 1.433 1.304 1.634 1.365 1.208 1.288
-500 1.461 1.275 1.344 1.369 1.409 1.228 1.290 1.173 1.507 1.301 2.026 1.361 1.416 1.280
-250 4.773 1.266 2.230 1.377 2.162 1.214 1.792 1.163 2.004 1.298 5.262 1.356 2.283 1.272
0 2.556 1.256 1.652 1.384 1.727 1.201 1.416 1.154 1.625 1.294 2.435 1.349 1.614 1.264
250 1.403 1.246 1.535 1.391 1.286 1.187 1.139 1.144 1.422 1.290 1.414 1.342 1.382 1.255
500 1.195 1.236 1.372 1.396 1.193 1.174 1.152 1.134 1.371 1.285 1.275 1.333 1.307 1.244
750 1.142 1.226 1.195 1.401 1.149 1.162 1.143 1.124 1.265 1.279 1.216 1.323 1.240 1.233
1,000 1.125 1.217 1.159 1.404 1.101 1.149 1.062 1.114 1.241 1.273 1.176 1.312 1.328 1.220
1,250 1.069 1.207 1.184 1.405 1.098 1.137 1.032 1.103 1.294 1.266 1.146 1.299 1.166 1.206
1,500 1.042 1.197 1.341 1.404 1.104 1.125 1.033 1.093 1.150 1.258 1.070 1.285 1.142 1.191
1,750 1.021 1.187 1.325 1.401 1.026 1.113 0.992 1.083 1.209 1.249 1.072 1.271 1.168 1.174
2,000 1.009 1.177 1.194 1.396 1.083 1.101 1.008 1.073 1.188 1.240 1.066 1.255 0.990 1.155
2,250 0.986 1.167 2.102 1.388 1.017 1.089 1.027 1.063 1.088 1.230 1.091 1.238 1.131 1.135
2,500 0.982 1.158 1.550 1.377 0.994 1.076 1.010 1.053 1.206 1.219 0.953 1.220 1.118 1.113
2,750 0.981 1.148 1.258 1.363 0.990 1.064 1.013 1.043 1.126 1.207 0.915 1.201 0.998 1.090
3,000 0.970 1.138 1.116 1.347 1.014 1.051 0.991 1.034 1.138 1.195 0.900 1.182 1.003 1.065
3,250 0.970 1.128 1.098 1.328 0.948 1.039 0.974 1.024 1.093 1.182 0.915 1.162 0.912 1.039
3,500 0.936 1.119 1.357 1.307 0.942 1.026 0.958 1.015 1.064 1.169 0.918 1.141 0.920 1.013
3,750 0.957 1.109 1.723 1.283 0.938 1.013 0.952 1.006 1.179 1.156 0.900 1.121 0.814 0.985
4,000 0.922 1.098 1.126 1.257 0.957 1.000 0.975 0.997 1.132 1.143 0.922 1.100 0.862 0.958
4,250 0.902 1.088 1.078 1.229 0.920 0.987 0.974 0.988 1.120 1.129 0.974 1.078 0.843 0.929
4,500 0.897 1.078 1.056 1.200 0.914 0.974 1.054 0.979 1.073 1.116 0.911 1.057 0.888 0.902
4,750 0.923 1.067 1.028 1.170 0.904 0.961 1.130 0.970 1.088 1.102 0.858 1.036 0.816 0.874
5,000 0.935 1.055 1.166 1.139 0.899 0.948 1.053 0.960 1.067 1.090 0.864 1.015 0.779 0.848
5,250 0.937 1.044 1.090 1.108 0.882 0.936 0.913 0.951 1.049 1.077 0.948 0.995 0.784 0.822
5,500 0.857 1.031 1.066 1.078 0.907 0.923 0.863 0.941 1.046 1.066 0.857 0.975 0.840 0.798
5,750 0.850 1.019 0.956 1.048 0.846 0.912 0.853 0.930 0.978 1.055 0.737 0.956 0.806 0.776
6,000 0.852 1.005 0.946 1.020 0.819 0.900 0.808 0.919 0.955 1.045 0.752 0.937 0.678 0.756
6,250 0.927 0.991 0.923 0.993 0.830 0.889 0.853 0.908 1.070 1.035 0.735 0.920 0.747 0.739
6,500 0.853 0.977 0.916 0.969 0.870 0.879 0.801 0.895 0.931 1.027 0.747 0.902 0.715 0.724
6,750 0.850 0.962 0.904 0.948 0.868 0.869 0.839 0.882 0.934 1.021 0.733 0.886 0.646 0.711
7,000 0.911 0.947 0.906 0.930 0.830 0.860 0.827 0.868 1.067 1.015 0.772 0.871 0.662 0.701
7,250 0.830 0.931 0.922 0.916 0.809 0.852 0.851 0.854 1.005 1.010 0.813 0.856 0.630 0.694
7,500 0.742 0.916 0.917 0.905 0.788 0.844 0.854 0.839 0.958 1.006 0.692 0.841 0.688 0.689
7,750 0.750 0.900 0.985 0.897 0.770 0.838 0.825 0.823 0.898 1.004 0.647 0.827 0.667 0.685
8,000 0.742 0.885 0.868 0.892 0.795 0.831 0.776 0.807 0.984 1.001 0.670 0.814 0.691 0.683
8,250 0.738 0.871 0.875 0.890 0.778 0.825 0.762 0.791 1.005 1.000 0.713 0.801 0.694 0.681
8,500 0.745 0.858 0.869 0.890 0.779 0.818 0.727 0.775 0.866 0.998 0.607 0.787 0.568 0.678
8,750 0.719 0.847 0.918 0.891 0.751 0.812 0.758 0.760 1.034 0.996 0.659 0.773 0.595 0.673
9,000 0.714 0.838 0.818 0.892 0.740 0.804 0.749 0.746 0.895 0.992 0.611 0.758 0.573 0.664
9,250 0.724 0.833 0.800 0.890 0.734 0.795 0.716 0.735 0.937 0.987 0.597 0.742 0.613 0.649
9,500 0.714 0.832 0.846 0.884 0.736 0.783 0.702 0.727 1.023 0.980 0.617 0.724 0.584 0.626
9,750 0.724 0.837 0.849 0.871 0.769 0.769 0.723 0.723 0.925 0.969 0.611 0.703 0.608 0.591
10,000 0.746 0.848 0.854 0.847 0.699 0.750 0.681 0.725 0.898 0.953 0.572 0.679 0.520 0.542

The distributions of taxable income appear noisier as sample sizes decrease. For example, compare the results at the third federal tax bracket to those at the fourth bracket: the sample size is larger in the former than the latter. The distributions around the provincial and territorial tax thresholds are confounded by the fact that these thresholds vary by province and territory and are fairly close to other convex kink points that could also induce bunching. For this reason, the results of bunching at provincial and territorial tax thresholds should be interpreted a bit more cautiously than the other results. However, the bunching responses are substantial in all cases, despite the potential for these factors to have confounded the analysis.

A comparison of the results across periods reveals that the majority of bunching occurs in the post-reform period. From 2001 to 2006, before pension income splitting was introduced, only a small amount of bunching is observed at most convex kink points. This greatly contrasts with the extent of bunching observed from 2007 to 2012, where the spikes in the distributions are very apparent.

To better quantify the extent of bunching observed in these charts, Table 3 uses the empirical density estimator from Chetty et al. (2011) (see Footnote 8) to estimate the magnitude of excess mass at each tax threshold. These results confirm that bunching is more prevalent from 2007 to 2012 than from 2001 to 2006. For example, the amount of bunching following the reform is 15.8 times larger than it was before pension income splitting was introduced at the lower bound of the second federal tax bracket, 6.4 times larger for the third and 2.4 times larger for the fourth. The results by year are slightly noisier given that the sample sizes are smaller. This results in taxable income distributions that are estimated less precisely. Nevertheless, in these cases, bunching continues to be more prevalent in the post-reform years. This is especially apparent when the results are compared over time at the second and third federal tax brackets, as well as the OAS recovery tax threshold, where sample sizes are still comparatively large.

Table 3
Empirical density estimates of bunching in taxable income at the thresholds, 2001 to 2012
Table summary
This table displays the results of Empirical density estimates of bunching in taxable income at the thresholds Direct tax thresholds, Indirect tax thresholds, Second federal tax, Second provincial/ territorial tax, Third federal tax, Third provincial/ territorial tax, Fourth federal tax, Old Age Security recovery tax and Employment Insurance recovery tax, calculated using percent units of measure (appearing as column headers).
Direct tax thresholds Indirect tax thresholds
Second federal tax Second provincial/ territorial tax Third federal tax Third provincial/ territorial tax Fourth federal tax Old Age Security recovery tax Employment Insurance recovery tax
percent
By time period
2001 to 2012 2.446Note *** 0.595Note *** 0.932Note *** 0.469Note *** 0.918Note *** 2.787Note *** 0.924Note ***
2001 to 2006 0.257Note *** 0.141Note *** 0.241Note *** 0.004 0.484Note ** 0.581Note *** 0.345Note *
2007 to 2012 4.056Note *** 0.908Note ** 1.536Note *** 0.892Note *** 1.182Note *** 4.402Note *** 1.229Note ***
By year
2001 0.328Note *** 0.291Note *** 0.342Note * 0.349Note * 1.345Note * 0.689Note *** 0.408
2002 0.258Note *** 0.070 0.154 0.020 -0.192 0.043 -0.381
2003 0.294Note *** 0.291Note *** 0.194 0.155 0.181 0.442Note ** 0.567
2004 0.150Table 3 Note  0.078 0.671Note *** -0.021 0.178 0.818Note *** 0.774Table 3 Note 
2005 0.360Note *** 0.090 -0.071 -0.245Table 3 Note  -0.546 0.740Note *** 0.343
2006 0.157Note * 0.043 0.217 -0.130 1.854Note *** 0.729Note *** 0.291
2007 2.152Note *** 0.815Note ** 0.727Note ** 0.567Table 3 Note  1.553Note *** 3.624Note *** 0.422
2008 2.792Note *** 2.680Note *** 1.498Note *** 2.085Note *** 0.820Note ** 5.028Note *** 0.977Note *
2009 4.467Note *** 1.450Note ** 1.312Note *** 0.085 0.698Note * 4.506Note *** 1.025Note **
2010 4.982Note *** 0.460 2.376Note *** 0.569 1.259Note ** 4.219Note *** 1.939Note ***
2011 5.247Note *** 0.086 1.628Note *** 0.748 1.456Note *** 4.759Note *** 1.849Note ***
2012 4.850Note *** 0.068 1.722Note *** 1.366Note * 1.278Note *** 4.279Note *** 0.893Note *

5.3 The effect of pension income splitting

The previous results show that income responses to taxation changed fundamentally from 2006 to 2007. This coincides with the introduction of pension income splitting. To further assess the extent to which the results are driven by splitting, this section delineates the analysis along several margins of variation that affected individuals’ eligibility to split pension income.

Table 4 repeats the previous analysis across individuals by marital status and whether they, or their spouses if married, are collecting private pension income. The effects of the convex kink points on effective marginal tax rates are reported in Panel A, and the subsequent bunching responses are reported in Panels B. The results show, first, that the effective marginal tax rate changes at each tax threshold are quite uniform across groups. This is not surprising given that the unit of taxation is the individual. The tax thresholds apply to everyone equally irrespective of marital status. Moreover, the tax code treats most types of income identically, so that whether the income derives from private pensions or other sources should not affect these results.Note 11

Table 4
Estimated changes in marginal tax rates and bunching at the thresholds, by marital status and pension income receipt, 2007 to 2012
Table summary
This table displays the results of Estimated changes in marginal tax rates and bunching at the thresholds Unmarried, Married, No pension income, Has pension income, Either, Individual and Spouse, calculated using percent units of measure (appearing as column headers).
Unmarried Married
No pension income Has pension income Either No pension income Has pension income
Individual Spouse Either
percent
Panel A — Changes in marginal tax rates
Direct tax thresholds
Second federal tax 6.843Note *** 6.117Note *** 6.394Note *** 6.838Note *** 4.707Note *** 3.375Note *** 4.261Note ***
Second provincial/territorial tax 2.149Note *** 3.073Note *** 2.546Note *** 2.710Note *** 3.105Note *** 3.244Note *** 3.198Note ***
Third federal tax 3.895Note *** 3.709Note *** 3.809Note *** 3.750Note *** 3.368Note *** 3.688Note *** 3.592Note ***
Third provincial/territorial tax 3.837Note *** 3.167Note *** 3.479Note *** 3.244Note *** 1.781Note *** 1.406Note ** 1.883Note ***
Fourth federal tax 3.925Note *** 1.594 2.942Note *** 2.925Note *** 2.321Note *** 2.061Note *** 2.280Note ***
Indirect tax thresholds
Old Age Security recovery tax 8.168Note *** 9.404Note *** 8.997Note *** 8.066Note *** 7.699Note *** 6.898Note *** 7.416Note ***
Employment Insurance recovery tax 18.250Note *** 19.020Note *** 18.620Note *** 19.010Note *** 17.440Note *** 15.060Note *** 16.660Note ***
Panel B — Bunching in taxable income
Direct tax thresholds
Second federal tax 0.072 0.025 0.045 0.346Note *** 7.327Note *** 8.299Note *** 7.077Note ***
Second provincial/territorial tax 0.124 0.021 0.065 0.093Table 4 Note  1.596Note * 1.351Note * 1.461Note **
Third federal tax -0.148 0.200 0.014 0.282Note * 3.884Note *** 4.282Note *** 3.505Note ***
Third provincial/territorial tax 0.505Note ** 0.132 0.306Note ** 0.034 1.880Note *** 2.120Note *** 1.804Note ***
Fourth federal tax 0.249 -0.328 -0.009 0.311Table 4 Note  2.913Note *** 3.143Note *** 2.784Note ***
Indirect tax thresholds
Old Age Security recovery tax 0.848Note ** 0.331Table 4 Note  0.472Note ** 1.086Note *** 7.195Note *** 8.661Note *** 7.056Note ***
Employment Insurance recovery tax 0.615 0.672Table 4 Note  0.639Note * -0.196 2.493Note *** 3.629Note *** 2.849Note ***

Despite the uniformity of treatment, the bunching responses vary significantly across groups. Among unmarried individuals, the responses are all small in magnitude and generally insignificant except in a few cases, notably at the OAS and EI thresholds and the lower bound of the third provincial or territorial tax bracket. Similarly, married individuals without a pensioner in the couple, who are unable to split income, exhibit bunching at most thresholds, but the magnitudes of the responses are comparatively small. These results could differ from those of the unmarried non-pensioners for several reasons, including differences in market behaviour responses to taxation or access to other tax planning technologies related to marital status. In addition, the results may simply be more precisely estimated among married individuals given that 72.3% of the individuals in the sample are legally married or in common-law relationships, as shown in Table 1. This analysis also shows that the bunching responses of married individuals in a couple with at least one person receiving private pension income are both relatively large in magnitude and statistically significant at every tax threshold. Being a pensioner appears to be a precursor to responding actively to the changes in marginal tax rates in a manner predicted by the standard model, described earlier. This is consistent with expectations regarding the role of pension income splitting in driving the results.

To further explore the role of splitting, Table 5 conditions on married individuals in the post-reform period and on whether and how the pension income splitting program is actually used. On balance, the effects of the tax rate increases on effective marginal tax rates are quite uniform across groups, as shown in Panel A. The only notable exceptions are among transferees, who receive pension income from their spouses, at the lower bounds of the third provincial and territorial brackets and the fourth federal tax bracket threshold. However, most higher-income earners tend to send income to their spouses rather than receive income from them, and the imprecision of these estimates is partly the result of small sample sizes. However, as Panel B shows, the bunching responses at every tax threshold are almost entirely driven by individuals who utilize the pension income splitting program.

Table 5
Estimated changes in marginal tax rates and bunching at the thresholds, among married individuals, by type of pension income splitting, 2007 to 2012
Table summary
This table displays the results of Estimated changes in marginal tax rates and bunching at the thresholds No splitting, Has splitting, Send, Receive and Either, calculated using percent units of measure (appearing as column headers).
No splitting Has splitting
Send Receive Either
percent
Panel A — Changes in marginal tax rates
Direct tax thresholds
Second federal tax 6.565Note *** 7.053Note *** 2.129Note *** 3.681Note ***
Second provincial/territorial tax 2.895Note *** 2.843Note *** 3.319Note *** 3.125Note ***
Third federal tax 3.755Note *** 3.540Note *** 3.811Note *** 3.540Note ***
Third provincial/territorial tax 3.212Note *** 2.150Note *** -0.214 1.481Note **
Fourth federal tax 2.843Note *** 2.523Note *** 1.670Table 5 Note  2.232Note ***
Indirect tax thresholds
Old Age Security recovery tax 8.361Note *** 8.305Note *** 5.403Note *** 7.137Note ***
Employment Insurance recovery tax 18.830Note *** 17.970Note *** 10.640Note *** 15.880Note ***
Panel B — Bunching in taxable income
Direct tax thresholds
Second federal tax 0.369Note *** 8.657Note *** 10.600Note *** 9.509Note ***
Second provincial/territorial tax 0.113Note ** 2.261Note ** 1.334Note * 1.864Note *
Third federal tax 0.316Note ** 4.313Note *** 6.223Note *** 5.084Note ***
Third provincial/territorial tax 0.084 2.365Note *** 3.074Note ** 2.655Note ***
Fourth federal tax 0.300Table 5 Note  3.396Note *** 5.137Note *** 4.140Note ***
Indirect tax thresholds
Old Age Security recovery tax 1.020Note *** 7.958Note *** 12.790Note *** 9.906Note ***
Employment Insurance recovery tax -0.048 2.925Note *** 7.961Note *** 3.946Note ***

Interestingly, these responses are qualitatively similar across individuals who send and receive pension income. This suggests bunching is the result of two types of tax planning responses. First, individuals who are pensioners are sending enough income to spouses that their taxable incomes are reduced to lower tax brackets, at which point they stop because the marginal tax rates of individuals and spouses have presumably equalized. Second, individuals with spouses who are pensioners receive income up to the point where their taxable incomes would otherwise enter higher tax brackets, and at the margin they would end up paying taxes equal to or greater than those already being paid by their spouses. Hence, couples appear to be effectively coordinating to reduce joint tax liabilities.

A final check of the importance of the pension income splitting program in driving these results is shown in Chart 3. Specifically, this chart plots the probability of sending or receiving pension income relative to each tax threshold analyzed, among married individuals in the post-reform period who are eligible for this program. The results show large spikes in the probability distributions around each threshold. This is consistent with expectations.

Chart 3

Data table for Chart 3
Data table for Chart 3
Table summary
This table displays the results of Data table for Chart 3. The information is grouped by Bin (appearing as row headers), Panel A — Second federal tax, Panel B — Second provincial/territorial tax, Panel C — Third federal tax, Panel D — Third provincial/territorial tax, Panel E — Fourth federal tax, Panel F — Old Age Security recovery tax, Panel G — Employment Insurance recovery tax, Send, Receive and Either, calculated using percent units of measure (appearing as column headers).
Bin Panel A — Second federal tax Panel B — Second provincial/territorial tax Panel C — Third federal tax Panel D — Third provincial/territorial tax Panel E — Fourth federal tax Panel F — Old Age Security recovery tax Panel G — Employment Insurance recovery tax
Send Receive Either Send Receive Either Send Receive Either Send Receive Either Send Receive Either Send Receive Either Send Receive Either
percent
-10,000 27.139 24.537 51.676 22.857 23.440 46.296 23.620 21.613 45.234 23.036 16.410 39.446 18.676 11.348 30.024 29.155 15.233 44.388 21.843 9.556 31.399
-9,750 27.809 22.890 50.700 23.627 23.597 47.224 22.322 15.699 38.021 22.700 15.370 38.070 14.975 9.898 24.873 29.035 16.282 45.317 23.167 11.667 34.833
-9,500 27.681 22.169 49.850 23.119 23.967 47.086 23.510 18.578 42.088 21.217 16.485 37.702 17.207 7.731 24.938 27.108 16.376 43.484 24.156 13.321 37.478
-9,250 28.073 23.289 51.362 24.657 22.987 47.645 22.154 11.812 33.966 23.863 15.024 38.887 17.962 9.383 27.346 27.037 16.366 43.403 24.035 11.053 35.088
-9,000 34.889 25.725 60.615 24.245 24.009 48.254 20.163 11.542 31.705 24.084 17.559 41.642 21.094 9.635 30.729 29.059 15.789 44.848 18.618 11.900 30.518
-8,750 35.388 25.881 61.269 24.463 22.932 47.395 21.446 12.373 33.819 25.436 19.692 45.128 17.367 7.283 24.650 30.846 14.778 45.624 23.154 7.984 31.138
-8,500 36.284 27.827 64.111 24.751 22.575 47.326 21.983 12.168 34.151 27.333 23.333 50.667 19.363 8.824 28.186 27.917 17.356 45.273 24.953 9.263 34.215
-8,250 28.036 23.113 51.149 24.969 22.943 47.912 21.326 11.307 32.634 27.368 17.929 45.297 17.500 8.250 25.750 29.697 13.636 43.333 23.757 9.945 33.702
-8,000 27.939 21.974 49.914 25.458 23.722 49.181 23.002 11.524 34.526 29.769 22.280 52.049 17.683 7.927 25.610 28.450 17.039 45.490 24.194 7.527 31.720
-7,750 28.030 22.835 50.864 25.162 23.491 48.653 22.753 13.502 36.255 29.087 20.190 49.278 17.829 11.111 28.941 27.372 17.263 44.635 26.411 12.903 39.315
-7,500 28.566 22.600 51.167 24.309 24.218 48.526 21.017 15.933 36.950 31.283 24.973 56.257 23.698 6.510 30.208 26.298 16.900 43.199 23.698 12.029 35.727
-7,250 27.937 22.802 50.739 25.259 23.048 48.307 21.026 12.777 33.803 24.640 17.373 42.013 18.667 6.400 25.067 26.987 17.964 44.950 26.016 11.585 37.602
-7,000 29.586 23.396 52.983 25.707 23.135 48.842 19.031 12.587 31.618 25.331 15.525 40.856 19.347 7.286 26.633 27.135 15.164 42.298 24.000 10.105 34.105
-6,750 33.224 25.199 58.424 25.648 23.378 49.026 20.110 10.883 30.993 23.713 17.065 40.778 18.254 6.614 24.868 27.389 19.108 46.497 23.493 9.148 32.640
-6,500 34.409 25.017 59.426 27.068 23.459 50.527 21.958 11.844 33.802 24.132 17.232 41.364 20.166 12.155 32.320 27.773 17.247 45.020 24.225 10.465 34.690
-6,250 29.424 24.954 54.378 40.329 26.865 67.194 21.501 13.142 34.642 25.745 22.837 48.582 21.622 9.730 31.351 26.718 17.133 43.851 28.571 14.677 43.249
-6,000 29.400 22.480 51.880 28.892 23.437 52.329 22.701 13.766 36.468 23.206 14.623 37.829 19.118 7.647 26.765 27.478 17.325 44.803 21.292 11.962 33.254
-5,750 34.958 23.780 58.738 26.252 23.235 49.487 21.230 13.505 34.735 24.860 13.106 37.966 23.077 7.692 30.769 29.024 17.805 46.829 26.667 6.237 32.903
-5,500 31.792 23.036 54.828 26.263 23.480 49.743 20.706 13.752 34.458 23.225 15.346 38.571 17.949 8.974 26.923 26.432 18.576 45.008 24.658 8.904 33.562
-5,250 33.763 23.602 57.365 29.067 24.239 53.306 20.074 13.471 33.545 23.456 15.346 38.802 17.302 6.745 24.047 26.131 15.159 41.290 25.966 7.082 33.047
-5,000 35.154 24.011 59.166 29.891 23.871 53.762 19.409 13.186 32.595 23.230 15.179 38.409 19.338 8.397 27.735 25.688 15.680 41.368 26.316 14.035 40.351
-4,750 33.693 23.060 56.753 32.373 25.472 57.845 22.373 12.466 34.839 23.425 15.723 39.148 17.989 9.259 27.249 25.217 19.913 45.130 27.027 6.143 33.170
-4,500 29.121 21.614 50.735 29.508 25.571 55.080 20.272 12.539 32.811 23.656 15.005 38.661 23.851 10.632 34.483 28.398 18.528 46.926 23.666 9.513 33.179
-4,250 29.022 21.795 50.818 27.783 23.431 51.214 22.601 16.791 39.392 22.064 16.218 38.282 18.919 6.486 25.405 25.953 20.145 46.098 26.379 8.633 35.012
-4,000 32.552 23.374 55.926 28.780 23.711 52.490 23.936 22.473 46.410 23.979 14.672 38.651 17.681 7.826 25.507 27.353 19.716 47.069 29.412 7.673 37.084
-3,750 28.773 22.251 51.024 28.514 23.320 51.834 22.485 14.671 37.156 26.492 20.694 47.186 18.063 9.424 27.487 28.856 19.237 48.094 27.830 8.255 36.085
-3,500 27.819 21.253 49.072 31.233 24.995 56.228 20.631 17.202 37.833 20.776 13.833 34.609 17.287 7.979 25.266 27.810 19.817 47.627 26.098 13.415 39.512
-3,250 28.113 21.025 49.139 34.088 26.552 60.640 20.207 14.162 34.370 22.770 14.376 37.146 18.541 11.550 30.091 27.730 18.977 46.707 30.324 8.102 38.426
-3,000 29.129 21.883 51.012 29.349 23.841 53.190 20.163 13.829 33.992 20.429 13.673 34.102 22.571 9.429 32.000 27.595 19.110 46.705 27.441 11.082 38.522
-2,750 28.173 20.770 48.943 28.563 22.596 51.159 20.857 13.980 34.837 25.158 13.924 39.082 20.760 8.772 29.532 29.649 18.852 48.500 27.336 7.710 35.047
-2,500 28.069 20.809 48.879 28.721 22.525 51.246 21.614 15.920 37.535 23.649 17.464 41.112 16.905 10.888 27.794 29.145 18.803 47.949 29.250 9.750 39.000
-2,250 28.861 20.385 49.246 28.703 22.208 50.911 23.960 11.474 35.434 23.869 21.725 45.594 17.112 8.556 25.668 28.318 18.343 46.661 28.606 11.058 39.663
-2,000 36.275 22.301 58.575 35.107 23.422 58.529 19.600 12.257 31.857 22.459 15.041 37.500 21.788 8.659 30.447 26.778 18.410 45.188 25.000 6.720 31.720
-1,750 29.962 20.623 50.585 29.095 22.673 51.767 20.364 12.622 32.986 23.745 19.454 43.198 17.819 8.511 26.330 29.427 18.634 48.061 20.844 8.707 29.551
-1,500 28.455 20.825 49.280 31.627 22.671 54.298 20.304 12.340 32.644 22.524 13.299 35.823 21.237 8.065 29.301 27.517 22.396 49.913 30.548 5.764 36.311
-1,250 31.078 21.461 52.539 36.025 24.662 60.688 21.623 11.604 33.228 23.363 13.097 36.460 18.539 8.146 26.685 27.265 20.366 47.631 20.216 9.434 29.650
-1,000 29.070 21.616 50.687 35.861 23.533 59.394 21.708 13.108 34.816 23.489 14.220 37.709 21.972 10.141 32.113 28.447 21.632 50.079 29.121 10.440 39.560
-750 30.236 22.205 52.441 31.170 22.763 53.933 23.706 12.274 35.981 24.464 13.519 37.983 21.228 8.440 29.668 32.095 25.597 57.692 30.028 8.499 38.527
-500 34.062 23.355 57.417 33.050 22.301 55.351 29.910 14.664 44.574 27.452 17.792 45.244 27.700 11.502 39.202 38.590 28.803 67.394 34.562 10.138 44.700
-250 47.327 40.529 87.856 46.664 28.590 75.254 38.155 26.262 64.417 33.900 28.633 62.533 32.594 18.771 51.365 40.952 43.916 84.868 41.248 28.358 69.607
0 42.701 35.270 77.971 39.570 25.856 65.426 27.133 27.549 54.682 27.768 23.694 51.461 19.140 27.957 47.097 39.463 30.124 69.587 32.158 11.618 43.776
250 28.143 30.329 58.471 37.671 25.845 63.516 20.343 20.284 40.627 21.006 17.145 38.151 14.734 19.324 34.058 29.545 22.414 51.959 32.234 5.838 38.071
500 28.089 21.782 49.871 31.812 24.866 56.678 20.858 15.140 35.997 22.081 16.185 38.266 14.961 17.848 32.808 31.303 17.713 49.016 32.329 3.836 36.164
750 27.018 20.593 47.610 27.760 22.558 50.318 20.394 13.392 33.787 22.854 17.112 39.966 17.101 13.913 31.014 31.107 16.889 47.996 31.953 3.254 35.207
1,000 27.332 18.942 46.274 28.024 22.009 50.033 20.259 13.003 33.261 22.276 15.315 37.591 14.970 13.473 28.443 32.232 15.115 47.347 29.024 5.277 34.301
1,250 26.997 18.996 45.993 28.383 22.894 51.277 20.346 10.750 31.097 21.816 11.300 33.116 15.946 12.973 28.919 28.384 15.455 43.838 28.779 3.779 32.558
1,500 26.196 18.019 44.215 30.058 28.173 58.230 20.088 11.921 32.009 22.898 14.036 36.934 17.925 11.321 29.245 31.305 14.159 45.465 31.487 5.831 37.318
1,750 26.990 17.907 44.897 29.200 28.183 57.383 20.340 10.054 30.394 19.690 12.205 31.895 17.771 9.036 26.807 32.075 12.875 44.950 29.769 4.046 33.815
2,000 27.369 16.612 43.981 31.222 20.959 52.181 21.901 9.354 31.255 21.733 12.607 34.340 14.970 11.677 26.647 31.444 14.778 46.222 26.545 4.000 30.545
2,250 25.509 16.944 42.453 47.050 29.188 76.238 21.384 11.557 32.940 20.296 12.113 32.410 18.430 13.311 31.741 31.149 18.690 49.839 33.227 3.195 36.422
2,500 26.268 17.331 43.599 39.119 27.816 66.935 22.301 9.220 31.521 21.607 12.582 34.190 16.258 10.429 26.687 30.201 13.033 43.233 30.960 4.644 35.604
2,750 26.410 16.687 43.097 30.592 27.276 57.868 21.872 9.685 31.558 20.403 13.645 34.048 17.799 8.738 26.537 30.931 10.223 41.153 28.618 4.934 33.553
3,000 26.146 16.664 42.810 29.040 22.312 51.352 21.210 8.327 29.537 21.739 12.516 34.256 18.671 9.810 28.481 29.818 11.719 41.536 25.532 3.901 29.433
3,250 25.548 16.338 41.885 28.666 20.739 49.405 19.698 10.813 30.511 21.948 14.877 36.825 16.129 6.129 22.258 29.521 10.904 40.426 29.134 5.118 34.252
3,500 26.381 15.939 42.320 35.046 26.457 61.503 18.992 11.681 30.672 22.578 14.529 37.108 16.000 9.333 25.333 28.225 13.155 41.379 29.317 4.418 33.735
3,750 25.843 15.349 41.192 37.226 33.634 70.861 21.296 8.838 30.135 21.248 15.708 36.957 20.767 6.390 27.157 33.680 13.264 46.944 33.621 3.448 37.069
4,000 25.612 16.044 41.656 28.127 25.253 53.380 20.698 7.711 28.409 21.881 15.744 37.625 15.858 8.414 24.272 29.315 15.228 44.543 33.193 4.202 37.395
4,250 25.604 15.656 41.260 28.784 22.910 51.694 20.952 6.840 27.792 23.077 15.516 38.593 18.241 9.121 27.362 30.445 19.438 49.883 24.017 5.240 29.258
4,500 26.097 16.278 42.375 29.041 21.784 50.824 19.449 10.757 30.207 27.636 15.030 42.667 18.596 7.719 26.316 30.068 14.150 44.218 32.922 4.115 37.037
4,750 25.875 15.663 41.538 28.463 20.352 48.816 19.718 9.331 29.049 29.644 19.671 49.315 18.707 4.762 23.469 28.155 16.227 44.383 32.377 4.918 37.295
5,000 26.587 16.891 43.478 31.589 25.224 56.813 20.726 10.363 31.089 25.644 19.053 44.697 18.118 8.362 26.481 32.373 15.912 48.285 34.862 3.670 38.532
5,250 27.568 18.879 46.448 29.757 23.799 53.556 20.618 9.083 29.700 24.012 15.007 39.019 19.113 9.898 29.010 30.244 18.293 48.537 31.674 4.525 36.199
5,500 24.499 14.778 39.277 30.244 23.717 53.961 21.581 8.970 30.551 24.252 12.663 36.915 19.231 6.993 26.224 30.261 18.294 48.556 29.362 4.681 34.043
5,750 25.162 15.371 40.533 26.909 19.741 46.650 20.825 7.198 28.023 21.273 12.422 33.696 18.868 9.811 28.679 32.588 10.703 43.291 28.899 6.881 35.780
6,000 26.912 15.500 42.413 26.393 18.801 45.193 18.443 10.843 29.286 22.259 11.866 34.124 14.599 8.394 22.993 31.940 13.545 45.485 24.468 2.660 27.128
6,250 28.801 18.448 47.249 27.586 18.043 45.629 20.020 8.832 28.852 19.152 13.265 32.418 19.795 8.532 28.328 31.164 9.418 40.582 34.234 3.604 37.838
6,500 26.193 14.290 40.484 27.044 18.611 45.655 21.174 7.918 29.093 22.399 11.326 33.725 16.732 5.058 21.790 31.360 11.200 42.560 36.232 3.382 39.614
6,750 28.556 15.909 44.465 27.161 17.559 44.720 22.344 8.516 30.861 20.331 12.372 32.703 18.251 7.985 26.236 29.969 13.509 43.478 31.361 5.917 37.278
7,000 29.315 18.148 47.463 27.040 17.777 44.818 19.105 8.574 27.679 22.133 12.109 34.242 19.588 6.529 26.117 30.792 14.200 44.993 35.859 5.051 40.909
7,250 25.503 16.374 41.877 28.060 18.646 46.707 18.578 10.142 28.720 24.656 16.031 40.687 13.483 7.116 20.599 32.675 18.314 50.988 28.655 7.018 35.673
7,500 23.197 13.079 36.276 28.795 18.778 47.573 17.946 8.375 26.321 22.935 17.920 40.855 17.530 9.562 27.092 30.598 9.402 40.000 35.450 7.407 42.857
7,750 23.049 12.801 35.850 30.669 21.853 52.521 19.028 8.401 27.429 20.424 15.947 36.371 18.443 8.197 26.639 25.735 12.316 38.051 30.208 7.292 37.500
8,000 23.196 12.449 35.646 26.737 18.569 45.306 18.533 9.713 28.246 22.442 14.026 36.469 19.444 8.333 27.778 28.546 11.208 39.755 33.668 7.538 41.206
8,250 22.846 13.146 35.993 27.624 18.006 45.630 19.517 8.652 28.169 22.716 13.920 36.635 21.739 8.333 30.072 30.408 16.144 46.552 25.641 8.718 34.359
8,500 22.077 13.397 35.474 28.286 17.681 45.967 20.804 8.040 28.844 22.171 11.224 33.395 19.502 6.639 26.141 29.905 11.238 41.143 32.278 9.494 41.772
8,750 22.014 13.813 35.828 30.202 20.656 50.857 20.795 9.786 30.581 20.796 13.186 33.982 17.376 5.674 23.050 28.136 8.961 37.097 29.714 6.857 36.571
9,000 23.278 13.058 36.336 25.836 17.112 42.948 20.106 8.617 28.723 21.048 11.092 32.140 19.835 7.025 26.860 27.533 9.751 37.285 30.128 8.974 39.103
9,250 23.880 13.402 37.282 25.707 16.714 42.420 20.878 7.709 28.587 21.811 9.932 31.743 15.663 5.221 20.884 24.752 11.287 36.040 35.632 7.471 43.103
9,500 23.828 12.842 36.670 28.958 19.160 48.119 18.036 7.791 25.827 18.515 10.993 29.508 18.794 10.638 29.433 27.048 13.143 40.190 31.410 8.333 39.744
9,750 24.981 14.341 39.323 29.473 18.318 47.792 22.256 7.654 29.909 21.019 11.296 32.315 16.016 10.156 26.172 31.504 10.569 42.073 26.471 5.882 32.353
10,000 26.797 16.649 43.446 29.721 20.272 49.993 18.800 7.382 26.182 20.626 12.317 32.942 20.717 8.367 29.084 25.103 14.198 39.300 37.500 5.263 42.763

5.4 Placebo checks

The validity of the estimator and robustness of the results in studies that use quasi-experimental methods in cross-sectional settings can be tested several ways. For example, Ganong and Jäger (2017) proposed a permutation test for the regression kink (RK) design that involves repeating the RK estimation at points along the running variable localized around the true kink to assess how the significances vary. Another approach is to repeat the analysis on a running variable or sample known not to be treated (Landais 2015; Messacar 2015). This approach is used here to assess how individuals known not to be affected by the OAS and EI recover tax thresholds behave around these points in the income distribution.

Prior to July 2013, individuals could not delay claiming OAS benefits to receive higher monthly payments upon receipt. This means the majority of taxfilers began collecting OAS when they became eligible, at age 65, since delaying provided no benefit. As a result of this exogenous variation in eligibility, a potentially valid control group at this tax threshold is individuals aged 60 to 64 who are unaffected by the recovery tax.Note 12 The analysis delineated by age is presented in Table 6, shown separately for individuals by marital status, private pension income receipt, and whether pension income splitting is observed. Panel A indicates that individuals’ effective marginal tax rates are unaffected by the recovery tax until they turn age 65. This supports this placebo test approach. Bunching responses are robustly observed only among married individuals who had pension income or used the pension income splitting program, as indicated in Panel B. This is consistent with the previous findings. This behaviour is driven predominantly by individuals aged 65 to 69 who are affected by the recovery tax.

Table 6
Estimated changes in marginal tax rates and bunching at the Old Age Security recovery tax threshold, by marital status, pension income receipt, type of pension income splitting, and age, 2007 to 2012
Table summary
This table displays the results of Estimated changes in marginal tax rates and bunching at the Old Age Security recovery tax threshold Unmarried, Married, No pension income, Has pension income, Pension income, Pension income splitting, No and Yes, calculated using percent units of measure (appearing as column headers).
Unmarried Married
No pension income Has pension income Pension income Pension income splitting
No Yes No Yes
percent
Panel A — Changes in marginal tax rates
Age 60 0.122 0.157 -0.339 0.551 -0.254 0.766
Age 61 -0.191 1.705 -0.376 -0.448 -0.345 -0.545
Age 62 0.001 0.524 0.404 0.687 -0.011 1.220Note *
Age 63 0.437 -0.565 -0.205 0.313 0.079 0.242
Age 64 -0.673 0.928 0.119 -0.345 -0.051 -0.460
Age 65 8.440Note *** 9.716Note *** 6.622Note *** 7.919Note *** 6.595Note *** 8.348Note ***
Age 66 8.314Note *** 9.447Note *** 7.573Note *** 7.046Note *** 8.190Note *** 6.590Note ***
Age 67 7.779Note *** 9.574Note *** 8.986Note *** 7.020Note *** 9.036Note *** 6.492Note ***
Age 68 8.380Note *** 9.090Note *** 10.740Note *** 7.152Note *** 9.554Note *** 6.920Note ***
Age 69 7.213Note *** 9.015Note *** 8.160Note *** 7.986Note *** 10.020Note *** 7.327Note ***
Panel B — Bunching in taxable income
Age 60 0.312 -0.135 0.078 0.891Note ** 0.179 1.102Note **
Age 61 -0.046 -0.436 -0.259 0.410 -0.167 0.600
Age 62 0.273 -0.437 0.260 0.249 0.100 0.527
Age 63 0.188 -0.076 0.050 0.476 -0.028 0.828Table 6 Note 
Age 64 0.095 -0.117 -0.260 0.488 -0.300 0.943Table 6 Note 
Age 65 -0.525 0.684 1.138Note ** 5.456Note *** 1.093Note *** 7.827Note ***
Age 66 0.709 -0.099 1.048Note *** 6.916Note *** 0.928Note *** 9.722Note ***
Age 67 1.279 0.553 0.966Note ** 6.930Note *** 0.938Note *** 9.657Note ***
Age 68 2.398Note ** 0.602 1.197Note ** 8.033Note *** 1.187Note *** 10.980Note ***
Age 69 3.099Note ** -0.153 1.095Note * 8.314Note *** 0.956Note *** 11.620Note ***

The primary analysis of bunching around the EI recovery tax threshold conditions on individuals who received these benefits, since those who did not are untreated. In Table 7, EI non-recipients are used as a placebo group to test how effective marginal tax rates and the distributions of taxable income would have otherwise evolved around this convex kink point in the post-reform period. As before, the analysis delineates individuals by marital status, private pension income receipt, and whether pension income splitting is observed. The results show that changes in effective marginal tax rates are meaningful only for those individuals receiving EI, as expected. The small discontinuities in the tax rates for those not receiving EI that in some cases appear significant may be attributed to the size of the dataset and the fact that tax rates generally increase with income. However, the magnitudes of the estimates in these cases are not economically relevant. The bunching responses are observed only among those individuals who both received EI and were eligible to split pension income, as expected.

Table 7
Estimated changes in marginal tax rates and bunching at the Employment Insurance recovery tax threshold, by marital status, pension income receipt, type of pension income splitting, and Employment Insurance receipt, 2007 to 2012
Table summary
This table displays the results of Estimated changes in marginal tax rates and bunching at the Employment Insurance recovery tax threshold Unmarried, Married, No pension income, Has pension income, Pension income, Pension income splitting, No and Yes, calculated using percent units of measure (appearing as column headers).
Unmarried Married
No pension income Has pension income Pension income Pension income splitting
No Yes No Yes
percent
Panel A — Changes in marginal tax rates
Has Employment Insurance income 18.250Note *** 19.020Note *** 19.010Note *** 16.660Note *** 18.830Note *** 17.540Note ***
No Employment Insurance income 0.350 0.696Note ** 0.174 0.243Note * 0.207 0.245Note **
Panel B — Bunching in taxable income
Has Employment Insurance income 0.615 0.672 -0.196 2.849Note *** -0.048 3.946Note ***
No Employment Insurance income -0.057 0.063 -0.098 0.002 -0.115Note * 0.108

5.5 Heterogeneous responses

Briefly considering how the primary results of this study vary across different personal characteristics is instructive. Much of the literature cited earlier found responses to income taxes are larger among women, the self-employed and individuals working in sectors with more flexible labour markets (Saez, Slemrod and Giertz 2012). On this basis, this section considers how effective marginal tax rates change and bunching responses vary by sex, type of income and sector of employment for unmarried (Table 8-1) and married individuals (Table 8-2).

First, Table 8-1 indicates that the effects of the tax thresholds on effective marginal tax rates are both consistent with the previous findings and uniform across groups, as shown in Panel A. This means that any differences in bunching across groups are not likely to be the result of differences in treatment. However, Panel B shows that no meaningful bunching responses to tax rate changes appear among unmarried individuals across groups, notwithstanding a few cases that appear weakly significant. For example, the self-employed are not much more likely to respond to changes in taxes by bunching than other workers. Second, Table 8-2 shows that, among married individuals, the results are qualitatively similar. The effects of the tax rate changes are uniform across groups, and no meaningful differences appear in the corresponding bunching responses.

Table 8-1
Heterogeneous responses among unmarried individuals, 2007 to 2012
Table summary
This table displays the results of Heterogeneous responses among unmarried individuals By sex, By type of income, By industry of employment, Has employment earnings, Has self-employment earnings, Has investment income or capital gains, Manufacture, construction or trade, Other non-agricultural and non-manufacture, Female and Male, calculated using percent units of measure (appearing as column headers).
By sex By type of income By industry of employment
Has employment earnings Has self-employment earnings Has investment income or capital gains Manufacture, construction or trade Other non-agricultural and non-manufacture
Female Male
percent
Panel A — Changes in marginal tax rates
Direct tax thresholds
Second federal tax 6.435Note *** 6.340Note *** 6.901Note *** 5.661Note *** 6.343Note *** 6.807Note *** 6.863Note ***
Second provincial/territorial tax 2.614Note *** 2.418Note *** 2.237Note *** 3.687Note *** 2.878Note *** 1.990Note *** 2.195Note ***
Third federal tax 4.338Note *** 3.130Note *** 3.569Note *** 3.627Note *** 3.840Note *** 3.165Note *** 3.896Note ***
Third provincial/territorial tax 3.402Note *** 3.580Note *** 3.435Note *** 3.839Note *** 3.993Note *** 3.225Note *** 3.403Note ***
Fourth federal tax 3.039Note ** 2.821Note ** 3.476Note *** 1.988 2.547Note ** 3.854Note *** 3.274Note ***
Indirect tax thresholds
Old Age Security recovery tax 8.626Note *** 9.639Note *** 8.170Note *** 8.353Note *** 8.469Note *** 9.051Note *** 7.714Note ***
Employment Insurance recovery tax 18.200Note *** 18.770Note *** 18.570Note *** 25.130Note *** 19.760Note *** 18.610Note *** 18.820Note ***
Panel B — Bunching in taxable income
Direct tax thresholds
Second federal tax 0.087 -0.028 0.055 0.138 0.171Note * 0.092 0.048
Second provincial/territorial tax 0.099Table 8-1 Note  0.004 -0.007 0.213 0.056 -0.107 0.098
Third federal tax 0.101 -0.106 -0.025 -0.229 0.214 -0.270 0.026
Third provincial/territorial tax 0.274Note * 0.352Note * 0.397Note ** -0.274 0.378Note * 0.286 0.416Note **
Fourth federal tax -0.139 0.099 -0.020 0.894 -0.025 0.264 -0.120
Indirect tax thresholds
Old Age Security recovery tax -0.009 0.483Note *** 0.231Note * 0.463 0.209 0.574Note * 0.067
Employment Insurance recovery tax 0.132 -0.070 0.018 -0.578Note * 0.127 -0.036 0.005
Table 8-2
Heterogeneous responses among married individuals, 2007 to 2012
Table summary
This table displays the results of Heterogeneous responses among married individuals By sex, By type of income, By industry of employment, Has employment earnings, Has self-employment earnings, Has investment income or capital gains, Manufacture, construction or trade, Other non-agricultural and non-manufacture, Female and Male, calculated using percent units of measure (appearing as column headers).
By sex By type of income By industry of employment
Has employment earnings Has self-employment earnings Has investment income or capital gains Manufacture, construction or trade Other non-agricultural and non-manufacture
Female Male
percent
Panel A — Changes in marginal tax rates
Direct tax thresholds
Second federal tax 4.102Note *** 6.027Note *** 5.664Note *** 5.986Note *** 5.022Note *** 5.715Note *** 5.631Note ***
Second provincial/territorial tax 3.295Note *** 2.904Note *** 2.599Note *** 2.716Note *** 3.231Note *** 2.459Note *** 2.779Note ***
Third federal tax 3.701Note *** 3.664Note *** 3.795Note *** 3.026Note *** 3.605Note *** 3.591Note *** 3.902Note ***
Third provincial/territorial tax 1.635Note ** 2.630Note *** 2.877Note *** 1.900Table 8-2 Note  2.408Note *** 2.821Note *** 2.844Note ***
Fourth federal tax 1.930Note ** 2.809Note *** 2.624Note *** 1.669Note * 2.623Note *** 2.702Note *** 2.811Note ***
Indirect tax thresholds
Old Age Security recovery tax 6.930Note *** 7.986Note *** 7.033Note *** 8.287Note *** 7.725Note *** 6.998Note *** 7.179Note ***
Employment Insurance recovery tax 15.420Note *** 17.900Note *** 17.460Note *** 18.790Note *** 17.490Note *** 17.360Note *** 17.730Note ***
Panel B — Bunching in taxable income
Direct tax thresholds
Second federal tax 6.081Note *** 4.624Note *** 3.064Note *** 3.971Note *** 5.705Note *** 2.258Note *** 3.747Note ***
Second provincial/territorial tax 0.944Note * 1.277Note ** 0.645Note * 1.044Note *** 1.359Note ** 0.549Note ** 0.710Note *
Third federal tax 2.834Note *** 1.618Note *** 1.394Note *** 2.157Note *** 2.386Note *** 0.834Note *** 1.757Note ***
Third provincial/territorial tax 1.357Note ** 0.926Note *** 0.749Note *** 1.547Note *** 1.211Note ** 0.539Note ** 0.875Note ***
Fourth federal tax 2.836Note *** 0.999Note *** 1.298Note *** 1.477Note *** 1.658Note *** 0.436 1.761Note ***
Indirect tax thresholds
Old Age Security recovery tax 3.294Note *** 1.933Note *** 1.145Note *** 2.151Note *** 2.959Note *** 0.761Note *** 1.396Note ***
Employment Insurance recovery tax 0.100 0.079 0.156Table 8-2 Note  -0.203 -0.059 0.002 0.293Note **

6 Conclusion

The standard model of labour supply predicts bunching responses in taxable income to convex kink points in budget sets created by the tax and transfer system. This paper assesses the extent to which older Canadian taxfilers, aged 60 to 69, exhibit such responses. Bunching was detected at various points along the income distribution coinciding with the lower bounds of the second, third, and fourth federal tax brackets and of the second and third provincial or territorial tax brackets; as well as with the recovery tax thresholds for Old Age Security and Employment Insurance benefits. This is consistent with expectations. Such behaviour is apparent from graphical inspections of the distributions of taxable income around these tax thresholds and is credibly estimated in an empirical density design. However, a closer inspection of this result finds that bunching occurs primarily because of pension income splitting between married individuals and their spouses in order to reduce joint tax liabilities. This finding offers novel evidence of intra-household tax planning behaviour that depends on the availability of tax deductions.

When a tax planning technology is introduced in a salient manner and very low costs—in terms of administration, effort and implementation—are associated with using the technology, individuals can be expected to proactively use the technology to reduce tax liabilities. As stated earlier, income sharing is also permissible for income drawn from the Canada Pension Plan and the Quebec Pension Plan. However, this transfer is not strictly notional, and more administrative procedures control the use of this tax planning provision. This suggests that the procedures associated with using a tax planning technology can significantly affect the level of responsiveness to income taxation. Another interesting finding from this study is that such behaviour occurs at the household level. This implies coordination that is to some extent consistent with the unitary model (Messacar 2017). However, in the absence of such a technology, taxable income—from labour, pensions and otherwise—is relatively non-responsive to changes in marginal income tax rates. This finding is consistent with the related literature on the elasticity of taxable income.

Several studies have found recently that individuals sometimes struggle to understand the true marginal costs of their actions at the time of making economic decisions. For example, Ito (2014) showed, using administrative data from the United States that household consumption of electricity often varies more with the average, rather than the marginal, price. Consumers do not always understand complex nonlinear electricity pricing schedules. Such behaviour has been coined “schmeduling” behaviour (Liebman and Zeckhauser 2004) in that economic agents are responding to a price “schmedule” rather than the true price schedule. In a related study, Messacar (2017) assessed the effects of the introduction of pension income splitting on the labour supply decisions of older Canadian taxfilers. That study found that individuals are more responsive to their average, rather than marginal, income tax rates at the time of making labour supply decisions at the household level. The finding from this paper that individuals bunch at convex kink points in their budget sets indicates that they are sensitive to marginal tax rates. However, this occurs ex post, at the time of filing taxes and depends on whether a tax planning technology exists to facilitate such behaviour.

Individuals do respond to marginal tax rates at the time of filing their taxes, but the underlying mechanism for this behaviour cannot be discerned from the data. For example, are taxfilers sufficiently tax code savvy and aware of how to use pension income splitting to minimize tax liabilities, or do they rely on the assistance of software or tax professionals? A better understanding of this issue would contribute to a large literature on tax literacy (Feldman and Katuščák 2006; Chetty, Looney and Kroft 2009; Finkelstein 2009; Chetty and Saez 2013; Taubinsky and Rees-Jones 2015; Feldman, Katuščák and Kawano 2016) and remains an important issue for future research.

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