OTTAWA - Government matters — a lot — when it comes to income inequality, a new study suggests.

Researchers at the Ottawa-based Centre for the Study of Living Standards looked at how much taxes and government benefits helped to even things out between the rich and the poor in Canada over the past three decades.

They found that taxes and spending have persistently dampened inequality, but not enough to stop the increase in inequality over time.

And they found there is still ample room for governments to be more aggressive in using policy to reduce inequality, since redistribution efforts appear to be far lower here than in other industrialized countries.

STORY CONTINUES BELOW SLIDESHOW

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  • Lowest Inequality: P.E.I. -- 0.372

    Number represents the Gini coefficient for the province, based on total income. Source: <a href="http://www.csls.ca/reports/csls2012-08.pdf">Centre for the Study of Living Standards</a> Photo: Hobolens via Flickr

  • 9: New Brunswick -- 0.399

    Number represents the Gini coefficient for the province, based on total income. Source: <a href="http://www.csls.ca/reports/csls2012-08.pdf">Centre for the Study of Living Standards</a> Photo: Smulan77 via Flickr

  • 8: Manitoba -- 0.401

    Number represents the Gini coefficient for the province, based on total income. Source: <a href="http://www.csls.ca/reports/csls2012-08.pdf">Centre for the Study of Living Standards</a> Photo: Hobolens via Flickr

  • 7: Nova Scotia - 0.410

    Number represents the Gini coefficient for the province, based on total income. Source: <a href="http://www.csls.ca/reports/csls2012-08.pdf">Centre for the Study of Living Standards</a> Photo: Iguanasan via Flickr

  • 6: Quebec -- 0.414

    Number represents the Gini coefficient for the province, based on total income. Source: <a href="http://www.csls.ca/reports/csls2012-08.pdf">Centre for the Study of Living Standards</a> Photo: Michael McDonough via Flickr

  • 5: Saskatchewan -- 0.420

    Number represents the Gini coefficient for the province, based on total income. Source: <a href="http://www.csls.ca/reports/csls2012-08.pdf">Centre for the Study of Living Standards</a> Photo: Smulan77 via Flickr

  • 4: Newfoundland -- 0.422

    Number represents the Gini coefficient for the province, based on total income. Source: <a href="http://www.csls.ca/reports/csls2012-08.pdf">Centre for the Study of Living Standards</a> Photo: Megan Mallen via Flickr

  • 3: Alberta - 0.426

    Number represents the Gini coefficient for the province, based on total income. Source: <a href="http://www.csls.ca/reports/csls2012-08.pdf">Centre for the Study of Living Standards</a> Photo: Jana-Lynn via Flickr

  • 2: Ontario -- 0.434

    Number represents the Gini coefficient for the province, based on total income. Source: <a href="http://www.csls.ca/reports/csls2012-08.pdf">Centre for the Study of Living Standards</a> Photo: dugspr via Flickr

  • 1: British Columbia -- 0.446

    Number represents the Gini coefficient for the province, based on total income. Source: <a href="http://www.csls.ca/reports/csls2012-08.pdf">Centre for the Study of Living Standards</a> Photo: Imparo via Flickr

"What is needed is political will," researchers Andrew Sharpe and Evan Capeluck conclude.

They looked at before-tax and after-tax income inequality between 1981 and 2010.

They found that before-tax income inequality rose 19.4 per cent over three decades.

But after governments were done taxing rich people more than the poor, and after governments handed out benefits to low-income families, income inequality rose just 13.5 per cent over that same period.

In other words, income inequality was 44 per cent less severe than it would have been if governments had not intervened.

Transfer payments – such as old-age benefits or family benefits — were responsible for most of this dampening effect, while taxation accounted for about 30 per cent of the reduction.

"It is evident that Canada’s redistribution policies considerably reduce market income inequality," the authors say.

The study also shows that most of the increase in inequality took place during the 1980s and 1990s, despite a recent public outcry denouncing rising inequality.

"Counter to popular perceptions, after-tax income inequality, while at an historically high level, has remained basically unchanged in the 2000s," the study states.

According to the study, in 2010, British Columbia was the most unequal province, while Prince Edward Island saw rich and poor closer together.

The offsetting effect of taxes and government programs was greatest in Newfoundland and Labrador, followed by Nova Scotia, while government redistribution of income was the least effective in British Columbia and Alberta.

The authors also ran several what-if scenarios to see what would have happened to inequality if governments had acted differently over the years.

Governments were most active in redistribution of income in 1994, they found. If they had kept up that level of redistribution, they would have eliminated half of the rise in inequality over three decades, the authors say.

They also compared Canada to other countries in the Organization for Economic Co-operation and Development. They found that Canada ranks 24th out of 35 countries in terms of equality in the late 2000s. And they found that Canada was one of the least active countries in terms of using tax or transfer policy to redistribute income, ranking 25th out of 30 countries.

If Canada acted in line with the average OECD country, nearly two thirds of the increase in after-tax inequality would have been eliminated, the study shows.

The authors caution that their findings don’t speak directly to the 1 per cent debate that brought people into the streets a year ago for Occupy Wall Street protests.

Most of the numbers in the report are drawn from Statistics Canada’s calculations of Gini co-efficients – a widely-used scale to measure income inequality in countries around the world.

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  • Child Well-Being Better In Equal Countries

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  • More Inequality, More Murder

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  • Everyone Benefits From Greater Equality

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  • 10. New Zealand

    > Gini coefficient: 0.330<br> > Change in income inequality: +21.8%<br> > Employment rate: 72.3% (6th highest)<br> > Change in income of the rich: +2.5% per year<br> > Change in income of the poor: +1.1% per year New Zealand performs well by a number of economic indicators, including employment, where it ranks sixth highest out of the 27 OECD countries in the study. Income in New Zealand has increased across the board since the 1980s, but the percentage annual increase among the top decile was more than twice as great as among the bottom decile. Among OECD nations, capital income in New Zealand as a percentage of total household income grew the most for the richest group and decreased substantially for the poorest group.<br> <a href="http://247wallst.com/2011/12/06/countries-with-biggest-spread-between-rich-and-poor/3/" target="_hplink">Read the entire post at 24/7 Wall St. </a>

  • 9. Australia

    > Gini coefficient: 0.336<br> > Change in income inequality: +8.7%<br> > Employment rate: 72.4% (5th highest)<br> > Change in income of the rich: +4.5% per year<br> > Change in income of the poor: +3% per year The difference in the annual increase in income between the richest and the poorest in Australia from the mid-1980s to 2008 is one of the largest among all countries in the study. The average annual change in income for the bottom decile was 3%, compared with the top decile's 4.5%. This caused the Gini coefficient to increase 8.7% over those years. Australia has one of the highest minimum wages, as a percentage of average wages, of all the G-20 countries. The country also has a fairly high employment rate.<br> <a href="http://247wallst.com/2011/12/06/countries-with-biggest-spread-between-rich-and-poor/3/" target="_hplink">Read the entire post at 24/7 Wall St. </a>

  • 8. Italy

    > Gini coefficient: 0.337<br> > Change in income inequality: +9.0%<br> > Employment rate: 56.9% (3rd lowest)<br> > Change in income of the rich: +1.1% per year<br> > Change in income of the poor: +0.2% per year In Italy, income inequality increased 9% between 1985 and 2008. According to the OECD, earnings for the wealthiest 10% increased an average of 1.1% each year, while earnings for the poorest 10% grew just 0.2% annually. Italy has the third-lowest employment rate among the 27 nations in the study, with just 56.9% of working-age adults holding jobs in 2008. Since 1985, unemployment benefits declined by more than 50% to one of the lowest recipient rates in the OECD.<br> <a href="http://247wallst.com/2011/12/06/countries-with-biggest-spread-between-rich-and-poor/3/" target="_hplink">Read the entire post at 24/7 Wall St. </a>

  • 7. United Kingdom

    > Gini coefficient: 0.345<br> > Change in income inequality: +7.9%<br> > Employment rate: 70.3% (10th highest)<br> > Change in income of the rich: +2.5% per year<br> > Change in income of the poor: +0.9% per year The UK had one of the biggest increases in the income gap between the wealthy and the poor over the past two and a half decades. On average, the income of the bottom 10% increased 0.9%, while income for the top 10% grew 2.5% per year. After Israel and Australia, the UK had the third-largest difference between the top decile's annual income increase and the bottom decile's increase. The income ratio of the wealthiest citizens to the poorest citizens is 10 to one.<br> <a href="http://247wallst.com/2011/12/06/countries-with-biggest-spread-between-rich-and-poor/3/" target="_hplink">Read the entire post at 24/7 Wall St. </a>

  • 6. Portugal

    > Gini coefficient: 0.353<br> > Change in income inequality: n/a<br> > Employment rate: 65.6% (14th highest)<br> > Change in income of the rich: +1.1% per year<br> > Change in income of the poor: +3.6% per year Despite its high Gini coefficient, Portugal's income inequality has been improving. From the mid-1980s to the late 2000s, the incomes of the country's poorest increased an average 3.6% each year. The incomes of the richest grew only 1.1% annually. The country has increased its efforts to redistribute income since the mid-1980s, such as through benefits for the unemployed.<br> <a href="http://247wallst.com/2011/12/06/countries-with-biggest-spread-between-rich-and-poor/3/" target="_hplink">Read the entire post at 24/7 Wall St. </a>

  • 5. Israel

    > Gini coefficient: 0.371<br> > Change in income inequality: +13.8%<br> > Employment rate: 60.2% (7th lowest)<br> > Change in income of the rich: +2.4% per year<br> > Change in income of the poor: -1.1% per year In Israel, the average income of the bottom 10% actually decreased between 1985 and 2008. On average, income of the top 10% increased 2.4% per year. During the same period, income of the poorest 10% declined 1.1% each year -- the worst rate of decline among the 27 nations studied. Only one other country, Japan, saw its bottom decile's income fall as well. According to the OECD, the top 10% of Israel's residents make 14 times more than the poorest 10%.<br> <a href="http://247wallst.com/2011/12/06/countries-with-biggest-spread-between-rich-and-poor/3/" target="_hplink">Read the entire post at 24/7 Wall St. </a>

  • 4. United States

    > Gini coefficient: 0.378<br> > Change in income inequality: +12.1%<br> > Employment rate: 66.7% (13th highest)<br> > Change in income of the rich: +1.9% per year<br> > Change in income of the poor: +0.5% per year Inequality in the United States increased significantly from 1985 to 2008, putting it in the fourth-worst spot in the study. As with many other countries in which income inequality has increased, average income has gone up across all income groups since the mid-1980s, but not equally. The income of the wealthiest 10% has greatly outpaced the poorest 10%. The share enjoyed by the top 0.1% in total pretax income quadrupled in the 30 years to 2008.<br> <a href="http://247wallst.com/2011/12/06/countries-with-biggest-spread-between-rich-and-poor/3/" target="_hplink">Read the entire post at 24/7 Wall St. </a>

  • 3. Turkey

    > Gini coefficient: 0.409<br> > Change in income inequality: -5.8%<br> > Employment rate: 46.3% (the lowest)<br> > Change in income of the rich: +0.1% per year<br> > Change in income of the poor: +0.8% per year Turkey was one of the few OECD countries to experience a narrowing of the gap between rich and poor, with income inequality improving 5.8% between 1985 and 2008. However, it still has the third-highest income inequality among the countries in this study. Part of Turkey's problem is a relatively low number of government programs to aid the poorest citizens. The average government social expenditure among OECD nations is close to 20% of GDP, while it spends just above 10% -- the third-lowest percentage. The wealthiest 10% of Turkey's residents make 14 times more, on average, than the poorest 10%.<br> <a href="http://247wallst.com/2011/12/06/countries-with-biggest-spread-between-rich-and-poor/3/" target="_hplink">Read the entire post at 24/7 Wall St. </a>

  • 2. Mexico

    > Gini coefficient: 0.476<br> > Change in income inequality: +5.1%<br> > Employment rate: 60.4% (8th lowest)<br> > Change in income of the rich: +1.7% per year<br> > Change in income of the poor: +0.8% per year Mexico has one of the highest rates of income inequality. Among all OECD countries, Mexico has the lowest amount of public social expenditure as a percentage of GDP. It also has the lowest unemployment benefit recipient rates. Finally, the country has the lowest minimum wages as a percentage of average wages.<br> <a href="http://247wallst.com/2011/12/06/countries-with-biggest-spread-between-rich-and-poor/3/" target="_hplink">Read the entire post at 24/7 Wall St. </a>

  • 1. Chile

    > Gini coefficient: 0.494<br> > Change in income inequality: n/a<br> > Employment rate: 59.3% (4th lowest)<br> > Change in income of the rich: +1.2% per year<br> > Change in income of the poor: +2.4% per year Chile is one of the few countries where the income of the poor increased at a higher annual rate than the income of the wealthy, 2.4% to 1.2%. Nevertheless, the South American nation has the worst income inequality among the 27 OECD nations examined. Chile has a particularly high rate of self-employed individuals, primarily because of its large farming class. The income ratio of the top 10% to the bottom 10% is 27 to one.<br> <a href="http://247wallst.com/2011/12/06/countries-with-biggest-spread-between-rich-and-poor/3/" target="_hplink">Read the entire post at 24/7 Wall St. </a>