PQ won’t get rich with new tax on wealthy

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Quebec's new Parti Quebecois government has mused about plans to introduce new higher tax rates for those with incomes over $130,000, and still higher taxes for those over $250,000. While more recent reports suggest these plans may be in flux, if enacted, Quebec would not be alone. Nova Scotia added a higher bracket in 2010; Ontario announced a high income bracket in April of this year as part of the NDP-Liberal budget deal.

From the perspective of fairness, it is not difficult to argue in favour of higher taxes on the highest earners. Those at the top of the income distribution have done the best over the last 30 years, and it may be thought fair to ask them to contribute more to the government pot. If government needs more revenue, it would be odd not to go first to those who have seen the highest gains, rather than ask for more from those who have struggled.

Moreover, the lack of progressivity in the top range of Canada's income tax stands out.

In the United States, the top federal tax bracket isn't reached until income of $388,351 (U.S). Until the 1970s, Canadian rates also exhibited progressivity throughout the top range of the income distribution with new brackets kicking in at very high income levels. For example, the top federal bracket of 80 per cent in 1971 wasn't hit until today's equivalent of $2.3-million (Canadian).

However strong the case for fairness may be, some harsh realities confront the Quebec finance minister's plans. Strong evidence (which I discussed previously for the case of Ontario's high income tax changes) suggests the bounty from higher taxes on high-earners will be limited.

There isn't a strong case to suggest that high-earners would work less or move their residence due to a few more points of income tax. Instead, it is most likely that high earners would rearrange their financial affairs in an attempt to lower their tax bills. For example, a tax avoidance scheme with some fixed amount in setup costs might begin to make financial sense once taxes exceed a certain level.

At its core, the proposition that high income tax brackets will yield significant revenue relies on the belief that those with access to the very best financial planning advice will fail to heed it.

To stop such tax leakage in response to high-income tax rate increases requires more than wishful thinking. A careful examination and reform of tax loopholes and a tightening of tax administration would help limit the avoidance response to taxation. However, such action requires careful consideration and can't be done on the fly. As other provinces consider altering the progressivity of their tax systems, more attention needs to go to tightening and improving the tax system rather than simply slapping a new rate on top.

Kevin Milligan is Associate Professor of Economics at the University of British Columbia