September 27, 2018 — The top 1 percent of earners reacted strongly to the federal tax hike on high earners 2016, according to a new report from the C.D. Howe Institute. In “Unhappy Returns: A Preliminary Estimate of Taxpayers Responsiveness to the 2016 Top Tax Rate Hike,” author Alexandre Laurin finds the underlying behavioural response of taxpayers resulted in $1.2 billion in fresh revenue for the federal government but cost provincial treasuries about $1.3 billion in lost tax revenues.
“The report uses a refined approach to estimate the underlying behavioral response of taxpayers to the rate hike,” said Laurin. “Stripping away changes in economic conditions, other tax changes, and one-off transitional factors such as moving forward capital income recognition (forestalling), shows a significant behavioral response to changes in marginal tax rates.”
This is a preliminary estimate using newly released CRA tax statistics, added Laurin. “Many commentators warned that high-income taxpayers would react to the hike by reducing their earned income or engaging in tax avoidance. Preliminary data bear out these predictions.”
The level of taxpayer responsiveness means that the hike likely yielded about a third of the tax revenues that would have been raised had no behavioral response occurred. It also led to an erosion of the tax base that resulted in provincial budgets suffering fiscal losses greater than the federal revenues raised.
The report recommends:
- The estimated taxpayer response to the tax hike may suggest that further tightening of the tax system to make tax avoidance harder and improve tax revenues in future.
- Perhaps as importantly, the intensiveness of the behavioural response in 2016 may also indicate that Canada has some flexibility to improve its personal income tax competitiveness vis-à-vis the US and the world, without incurring large fiscal losses to government revenues. Canada’s top combined federal/provincial personal income tax rate is among the highest of the OECD.
- High personal taxes disadvantage Canada in the competition for global talent. Lower personal income taxes in the US, in particular, hurt Canada’s attractiveness to high earners, and its appeal as a location for head offices. A small reduction to the top tax rate would cost little federally, while provinces could enjoy a windfall because of its positive impact on the taxable income base.
- Alternatively, doubling the income threshold at which the top tax rate applies would reduce Canada’s disadvantage with America – and, in the same vein as above, create a revenue windfall for cash strapped provinces.
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada’s most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.
For more information contact: Alex Laurin, Director of Research, C.D. Howe Institute; Laura Bouchard, Communications Officer, C.D. Howe Institute, at 416-865-9935 or firstname.lastname@example.org