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 50^th 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%:

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?