Taxing the highest-income earners in Canada has become vogue, on the grounds they have more resources to handle the burden of raising much needed revenue for governments.
Seven of the nation’s 10 provinces have adopted higher taxes on the so-called rich since 2010, with mixed success. Even so, Prime Minister Justin Trudeau’s Liberal Party won elections in October partly on a plan to do the same at the federal level.
Trudeau will probably be more successful retaining revenue with the policy than his provincial counterparts, because high-income earners are less likely to leave the country than to move provinces, according to a study published Wednesday.
One of the biggest problems with taxing the rich is they are mobile, and can move from one jurisdiction to another. There is some evidence that Quebec’s tax hikes on high-income earners has led to an exodus from the French-speaking province.
Kevin Milligan, a University of British Columbia professor who advised Trudeau on economic matters before the election, and the University of Toronto’s Michael Smart, ran simulations that showed “substantial responsiveness” by wealthier families facing tax increases. To study this, they looked at what would happen if each province lifted the tax rate on the top 1 percent of earners by 5 percentage points.
“While taxing top earners may seem like an easy way to bring in more revenue, provinces will receive much less than expected if they fail to recognize how tax hikes alter behavior,” they wrote in a statement outlining the paper they wrote for the Institute for Research on Public Policy.
Federal tax increases, however, wouldn’t have as much impact on behavior since it’s tougher to move countries than it is to move provinces. “If the federal government were to increase its tax rates on high incomes -- or if the provinces coordinated their own actions -- there might be less scope for this behavioral response,” Milligan and Smart wrote.
It’s a conclusion that should come as some relief to the Prime Minister’s Office.
Trudeau campaigned on reducing inequality and aiding the prospects of the middle class. Part of that program is creating a new tax rate of 33 percent for people earning more than C$200,000 ($150,000) a year, to cut taxes for lower earners. The highest tax rate had previously been 29 percent.