Tax System and Tax Policy: Taxation of High Incomes

Economic Issues 2D03
Tax System and Tax Policy: Taxation of High Incomes (A5)
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  • Background:

In this section, draw on Statistics Canada’s public tables to cover the following:

Who are the top 1%?

  • Top income cut-off, average income, share of income from labour & how much tax they pay
  • Sex and age
  • Province/Location

Compared to the bottom 50th percentile of tax filers, how has the income share and effective tax rate of the top 1% evolved over the data period?

By province, how has the income share and effective tax rate of the province-specific top 1% evolved over time?

  • Policy evaluation.

Consider the following proposal to increase the top marginal tax rate on the top (province-specific) 1%:

  Base Tax System, 2020 Fictitious System, +5
  Top MTR threshold ($) MTR (%) Top 1% MTR threshold ($) MTR (%)
 
NFLD 189,604 18.3 210,200 23.3
PEI 63,969 16.7 172,400 21.7
NS 150,000 21 191,900 26
NB 160,776 20.3 175,000 25.3
ON 220,000 13.16 260,600 18.16
MB 72,164 17.4 202,600 22.4
SK 129,214 14.5 209,800 19.5
AB 314,928 15 297,900 20
BC 157,747 16.8 244,800 21.8
Federal 214,368 33 244,800 33

 

Cover the following issues (by province) with this proposal (Assume a constant ETI of 0.664):

  • What is the net revenue effect (by province) of this proposal? Comment on any noticeable provincial differences.
    • How much of the mechanical revenue gain disappears because of a behavioural effect?
    • What are the revenue and mechanical effects per tax filer?
    • Why is the elasticity of taxable income important?
  • What might explain these differences
    • Think about skewness & revenue gain share of the mechanical effect
  • What is the marginal cost of public funds?
  • Explain and calculate the optimal province-specific top 1% marginal tax rate. How far off is it from the fictitious +5 marginal tax rate?
  • Assuming no income shifting, what is the size of the vertical fiscal externality?
  • What are the progressivity implications of this proposal?

 

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