High taxes and overregulation have reduced social mobility in Canada, MEI finds

Montreal, October 17, 2024 – High taxes and excessive regulation are making it harder for Canadians to climb the income ladder, shows a study published this morning by the MEI.

“We wanted to find out what economic conditions are required to help Canadians who aspire to do better than their parents,” explains Vincent Geloso, senior economist at the MEI and co-author of the study. “Economic studies have clearly shown that lower taxes and regulatory burdens tend to favour growth and income mobility, to the benefit of the least well-off in society.”

The researcher quotes Nobel Prize winner Gary Becker’s work which suggests markets are potent vehicles for income mobility.

Further research has shown that higher levels of economic freedom lead to higher income mobility, both directly by giving individuals more opportunities to increase their incomes, and indirectly by favouring economic growth, which tends to have a higher net positive effect on the least fortunate.

Using Quebec as a case study, the MEI’s publication illustrates how lower economic freedom correlates with a reduction in social mobility.

Quebec ranks the lowest among Canadian provinces in terms of economic freedom. That is due to a high level of taxation, regulation and government involvement in the economy.

For example, the province has long had the highest level of fiscal pressure in the country, with taxes absorbing an estimated 38.9 per cent of all economic activity in the province in 2022.

The authors explain that a high tax burden reduces income mobility by limiting an individual’s ability to keep their earnings and invest them.

“The unfortunate reality is that Quebec’s status as a high tax and high regulation jurisdiction prevents a large number of Quebecers from moving up the income ladder,” said Gabriel Giguère, senior policy analyst at the MEI and co-author of the study. “The data is clear: there are more people stuck in the same income decile than there would otherwise have been because of government intervention, and that is deplorable.”

Using longitudinal data from Statistics Canada, the study tracks the percentage of Canadians in the poorest 10 per cent who managed to see their incomes rise by three deciles or more between 2016 and 2021, essentially joining the lower middle-class or higher. (This is a concept known as relative income mobility.)

It finds that Quebec, which has the lowest level of economic freedom in the country, also has the lowest level of income mobility among Canada’s most populous provinces.

After taxes and redistribution, the percentage of Quebecers in the lowest decile who joined the lower middle-class or above between 2016 and 2021 was 20.2 per cent.

Meanwhile, the province of Alberta, which has the highest level of economic freedom in the country, also has the highest level of income mobility.

After taxes and redistribution, the percentage of Albertans in the lowest decile who joined the lower middle-class or above between 2016 and 2021 was 25.5 per cent.

If Quebec had a similar level of relative mobility as Alberta, an additional 25,400 Quebecers could have left the poorest decile to join the lower middle-class or above between 2016 and 2021.

The study also looks at the evolution of income mobility for different generations of Quebecers. It finds that Quebecers born to parents who were among the bottom 20 per cent of income earners in the early 1960s were 6.1 percentage points less likely to inherit this socioeconomic status than those born in the early 1980s.

“As the welfare state has expanded in Quebec, so has the likelihood of being stuck in the same socio-economic state as one’s parents,” explains Giguère. “We might have gained more economic equality, but it has been at the expense of growth and our ability to improve our situation.”

The MEI study is available here.

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The MEI is an independent public policy think tank with offices in Montreal and Calgary. Through its publications, media appearances, and advisory services to policymakers, the MEI stimulates public policy debate and reforms based on sound economics and entrepreneurship.

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