Allan Lanthier is a former chair of the Canadian Tax Foundation.
Rookie U.S. Congresswoman Alexandria Ocasio-Cortez has created a stir by calling for a U.S. personal income tax rate of 70 per cent for high-income individuals. In a recent interview, Ms. Ocasio-Cortez stated that “people are going to have to start paying their fair share in taxes” – reminiscent of Finance Minister Bill Morneau’s statements when the ill-fated private corporation tax proposals were released in 2017.
Ms. Ocasio-Cortez has supporters. Paul Krugman, a Nobel Prize winner in economics and a “soak-the-rich” advocate, wrote that one economic study estimates that the optimal top tax rate – the rate that should raise the maximum amount of tax revenue from the wealthy, for redistribution to those who are not as well off – is 73 per cent, while another study puts the rate at more than 80 per cent. But both studies acknowledge that a high marginal rate would result in behavioural changes on the part of high-income individuals, including incentives to work less, to avoid tax or even to leave the country.
As is the case in the United States, Canada’s top personal tax rate used to be much higher than it is today. In 1971, for example, the top Canadian rate (federal-provincial combined) was about 80 per cent, applicable to taxable income in excess of $400,000 (about $2.5-million in today’s dollars). However, prior to 1972 tax reform, the tax base was narrow – for example, capital gains were exempt from any tax – and the ability to avoid tax was even greater than it is today.
Today, the top personal tax rate in Canada is about 53.5 per cent. So should Canada (or the United States for that matter) go to a top rate of 70 per cent or more? The answer is a resounding no.
There are few estimates – and considerable uncertainty – of the effect of higher tax rates on economic growth and job creation in the medium to long term, a fact acknowledged by the authors of the first study cited by Mr. Krugman. They state that the highest marginal rate should reflect not only short-term responses but long-term consequences as well, but conclude that “we unfortunately have little compelling empirical evidence to assess whether taxes affect earnings through those long-run channels.” So the suggested rate of 73 per cent takes little if any account of possible long-term impacts, including in areas such as education and career choices, risk-taking and entrepreneurship, or the future health of an economy.
Take the example of a Canadian university student who is considering a career in medicine. She understands that there will be years of education and sacrifice, and that she will owe more than $100,000 in student debt by the time she starts to practise. Now add the assumption that her marginal rate on earnings beyond a certain amount will be 70 per cent. She may decide to choose a less challenging vocation. Or possibly pack her bags and move her future medical career elsewhere.
And what about Canada’s next generation of entrepreneurs and job creators? A small-business owner wants to expand his business. He knows that there will be years of challenges and that the business could fail. He is already dealing with a federal government that seems unpredictable and, at times, anti-business, and with a burdensome regulatory environment. Should the business succeed, he now faces a confiscatory personal tax rate as well. So why not get out now and set up shop in another country.
In 2017, the highest average personal income tax rate for the 35 OECD member countries was 40.9 per cent, well below the top Canadian rate of 53.5 per cent. Only five countries had a top rate above Canada’s.
In short, Canadian individuals are already being taxed to death. A socially optimal tax rate that seeks to maximize the redistribution of income from one class of Canadians to another is an idea whose time has not come. Instead, the government should repeal its 4-percentage-point rate hike from 2016 and return the top personal marginal rate to just below the psychological barrier of 50 per cent: Or in the alternative, only apply the increase to rate brackets that are well above today’s taxable income threshold of $210,000.