IS RAISING THE TOP TAX RATE A BAD IDEA?
Earlier this month, the Liberals released their middle-income tax package, which they intend to promote as a better alternative to the Conservative’s Family Tax Cut package in the upcoming 2015 election.
Part of Liberal plan included a reduction in the middle tax rate of 1.5 percentage points, which would cost $3 billion. To pay for this, the Liberal plan proposed a new 33 per cent federal tax rate for taxable incomes above $200,000, up from 29 per cent. In fact, the increase in average tax for someone earning over $200,000 would be only 2.2 per cent, taking into account the reduction of 1.5 percentage points in the second tax rate.
The proposed increase in the top rate would raise the combined federal and provincial top tax to about 53 per cent in Ontario and Quebec and, according to some, would apparently lead to a boom in “for sale” signs for high-income Canadians. The top combined rate in New Brunswick would rise to around 58 per cent.
According to the Conservatives and other critics, the additional revenues the Liberals are betting on from the introduction of the high-income tax rate won’t be forthcoming because as one critic wrote in the Globe and Mail “The tax base shrinks as taxes go up because high earners resort more to tax avoidance – by changing their residency, sheltering income, getting paid in stock options or hiring even better accountants.”
Apparently this “whopping big” increase of 4 percentage points in the top federal rate (2.2 per cent increase in the average rate) is going to be a huge boost to the “home moving” industry and to the accounting profession. As a result the Liberal fiscal plan has a big financing gap in it.
The same critic made the claim that “Almost no tax policy has been as thoroughly debunked as the idea that raising the top marginal rate above 50 per cent brings in more government revenue.”
Mr. Mulcair, who has already stated he won’t raise income taxes, has declared that a top rate of 50 per cent would represent “confiscation”. On the other hand, he is prepared to raise corporate taxes apparently on the belief that capital is not mobile.
These are quite dramatic claims. What were those silly Liberals and their economic advisers thinking? Most economists would cringe at the claim that any tax policy issue had ever been “debunked” or that a top rate of 50 per cent necessarily represents confiscation
It is a reasonable to argue that, if taxes are raised on high-income “mobile” labor, these individuals may consider moving to a lower-income tax district.
Bur the size of the tax increase and the level of income to which it applies would be critical. The final decision would depend on a host of other socio-economic variables and not just on tax rates. Much higher tax rates (70 per cent) have been experienced in Canada in the past but no one is suggesting going back to those levels.
The Liberal plan is proposing a 2.2-point increase in the average tax rate (4 points in the top marginal rate) for anyone earning above $200,000. In other words if you earned $250,000 you would pay an additional tax of about $1,350; if you earned $300,000, your additional tax would be $3,300; at $500,000 of income the additional tax would be $11,300; a “millionaire” would pay an additional tax of $31,300.
According to critics these “huge” increases in taxes would lead to a wave of emigrants to lower tax districts.
But where would these high-income earners consider moving? No doubt some might consider New York City. For someone living in New York City, the combined top federal, state, and city tax would be tax 46.6 per cent for someone earning $209,000 and 50.7 per cent for someone earning more than $411,000.
How about moving to California? For someone earning $200,000, then the combined federal and state top rate is 42.3 per cent; for someone earning $311,000 the combined federal and state top rate is 44.3 per cent; and for someone earning $411,000 the combined federal and state rate is 50.9 per cent.
Quite a few states have no state taxes so the top marginal rate for someone earning more than $411,000 is 39.6 per cent. Texas is a good example and maybe there would be Canadians willing (because of a 13 point difference in the top rate) to pack up their families and move to Texas.
Nevertheless, a high-income mobile person living in Toronto or Montreal or Vancouver might want to think twice about putting up a “for sale” sign and moving to New York or California or many other state especially when you consider that the New York and California taxes, as well as the taxes of every other state, do not include much in the way of revenues to fund public health and education. These expenses are left to the individual. Indeed, the health and education infrastructure in the U.S. has being deteriorating for years.
If you can’t move, then there may be ways to reduce your tax burden. This is definitely a good idea if you haven’t done so already. However, most high-income people (earning above $200,000) have already maxed out their tax avoidance opportunities. It is very likely that most high-income individuals are not even paying an effective federal top tax rate close to 29 per cent or a combined top rate even close to 50 per cent
There may be other reasons for not raising the top tax rate by 4 points and the average rate by 2.2 points, but arguing that such a small increase would lead to a major exodus of high income Canadians isn’t one of them.
Arguments that there is a major funding gap in the Liberal platform have no merit.