Poorly conceived personal income tax changes could result in the loss of more entrepreneurial high-income earners
The new Liberal government plans to raise personal income taxes on the top Canadian income-earners to fund a tax decrease for the middle class.
According to Statistics Canada, to be in the top 1 per cent in 2013, a tax-filer needed to have a total income of at least $222,000. To be in the top 10 per cent, they required $89,200. The Liberal plan calls for a new 33 per cent federal tax rate on Canadians who earn more than $200,000 – up from the previous top rate of 29 per cent. The plan also maps out a reduction in the rate from 22 per cent to 20.5 per cent for those earning between $44,702 and $89,401.
There are two reasons why this strategy should be revisited.
First, while the top 1 per cent earn about 10 per cent of the Canadian income distribution, they provide about 20 per cent of personal income tax revenue. This suggests that the income tax system is already quite progressive in terms of the top 1 per cent paying more than their share. Raising this rate is not about greater fairness, it is simply about getting the top 1 per cent to pay more.
In 2014, of 25,453,210 Canadian tax-filers, 16,792,270 (two-thirds of the total) reported a total income of less than $45,000. So the bottom two-thirds of Canadian tax-filers will see no tax relief from this tax cut. It would be fairer (and efficiency enhancing) if the government simply brought in reductions for all income tax-filers.
Second, there is no guarantee that raising taxes on the top 1 per cent will generate the money necessary to replace the revenue decline from middle-class incomes.
Economist Jack Mintz has noted that, with the Liberals’ four-point tax hike, Canada will go from having the seventh highest to the third highest tax rate for the top income bracket in the Organization for Economic Co-operation and Development (OECD).
The supply-side economics theory demonstrated by the Laffer Curve shows the relationship between tax rates and government revenue. According to the theory, raising tax rates increases revenues at lower rates – as rates rise, a work disincentive effect kicks in as well as a stronger incentive to avoid tax, eroding revenues. In other words, there is rate of taxation that maximizes revenues. With the seventh highest rate in the OECD, Canada is likely already at the revenue maximizing rate range.
Moreover, higher rates may encourage entrepreneurial high-income earners to migrate to lower-tax jurisdictions, depriving the economy of their skills. As a case in point, in 2012 Quebec created a new top tax bracket for people earning at least $100,000, raising their rate to 25.75 from 24 per cent. It’s likely no coincidence that in Statistics Canada’s recent report on high-income tax-filers, Quebec was the only province to show a decline in the number of top one per cent of tax-filers, from 43,360 in 2012 to 40,825 in 2013.
In the end, tax systems and rates are important ingredients in international economic competitiveness. It would be a shame if Canada’s recent progress on more internationally competitive corporate tax rates was neutered by poorly conceived personal income tax changes that resulted in the loss of more entrepreneurial high-income earners while doing little to ease taxes for the vast majority of Canadians.
This tax plan is not geared to enhancing equity or efficiency.
By Livio Di Matteo
Livio Di Matteo is a senior fellow at the Fraser Institute and a professor of economics at Lakehead University in Thunder Bay, Ont.