Canada’s wealthy may have started a tax revolt, and Ontario is the first to notice

NationalPost.com –  – Economists have long warned that a marginal rate of 50 per cent is a psychological threshold that, if crossed, persuades taxpayers to take evasive action
November 20, 2017,   JOHN IVISON

OTTAWA — Last week’s Ontario fiscal update may have yielded the tax equivalent of a butterfly moving its wings in one jurisdiction and causing a tornado in another.

The provincial update revealed that personal income tax revenues in the country’s largest province were downgraded to come in nearly $2 billion lower than forecast in the spring budget, despite an upgrade in projected economic growth.

No explanation was offered for this unusual set of circumstances — tax revenues should rise in a growing economy — but the suspicion is that high-earning Canadians are fed up seeing more than 50 cents on every dollar they earn over $200,000 taken by the taxman.

In short, they are behaving exactly as all the studies on the subject predicted they would — they are increasingly engaged in what is known euphemistically as “tax planning.”

Alexandre Laurin, research director at the C.D. Howe Institute, forecast just such a response two years ago when the Liberals enacted their tax plan. In their election platform, the Trudeau Liberals said they would pay for their planned middle-bracket tax cut by asking the wealthiest “to give a little more.”

A new tax bracket of 33 per cent was introduced for those earning more than $200,000. As a result, the federal government saw its personal income tax revenues dip by $1.2 billion for 2016-17, as the gains from the increased top bracket failed to cover the cost of lowering the middle band and people scuttled to avoid paying the new tax

The problem is that the provinces have been raising their rates too. Ottawa’s increase pushed combined federal/provincial top rates in six provinces over 50 per cent.

New Brunswick is highest, with a top combined rate of 58.75 per cent, followed by Nova Scotia at 54 per cent, Ontario at 53.33 per cent (including the provincial surcharge), Quebec at 53.3 per cent, P.E.I. at 51.37 per cent and Manitoba at 50.4 per cent.

By contrast, President Donald Trump is proposing to lower income taxes for many Americans by reducing the number of brackets from seven to four. The top rate would remain at 39.6 per cent for those earning more than US$500,000 but, even then, only California and Hawaii would have combined rates above 50 per cent.

Economists have long warned that a marginal rate of 50 per cent is a psychological threshold that, if crossed, persuades taxpayers to take evasive action to minimize their tax liability.

Laurin looked at the behavioural response in the U.K. and even Quebec.

In 2009, the British government raised its top rate of income tax to 50 per cent, but it was forced to reverse itself and reduce the rate to 45 per cent after a public backlash.

In Quebec in 2012, the new government envisaged a combined federal/provincial rate of 55 per cent for top earners, but the exodus of taxpayers to Ontario promoted a partial backtrack, limiting the increase in the top rate to 50 per cent.

The suspicion is that high-earning Canadians are fed up seeing more than 50 cents on every dollar they earn over $200,000 taken by the taxman

In his analysis, Laurin estimated the shrinking tax base would hit provincial governments particularly hard, since they would not benefit from the revenues generated by raising the top rate.

That seems to be exactly what has happened.

No details are provided on the shocking decline in Ontario’s income tax revenue but Laurin said it was obviously a surprise that the numbers came in lower than expected.

“A lower base in 2016 will translate into lower revenues in 2017 as well, since revenues are grown from a lower base,” he said. “For 2017-18, this is about a five-per-cent unexpected personal income tax revenue shortfall, which is huge. Since no explanation is provided, tax planning is the likely culprit.”

It’s not yet clear whether the phenomenon of lower income tax revenues in growing economies is widespread and sustained — Nova Scotia saw a marginal dip in income tax receipts last year between estimated and actual returns.

In its recent fiscal update, Ottawa was bullish about personal income tax, forecasting increases averaging 4.4 per cent annually — a rosy view of the economy that justified new spending of $1.8 billion this year. That optimism was presumably encouraged by the government’s plan to clamp down on use of private corporations as tax shelters — a plan that, if now abandoned, is likely to result in significant income tax seepage.

The Ontario fiscal update suggests that the taxable base may have shrunk already, which will likely mean reduced personal income tax revenues at all levels of government.

Ottawa and the provinces may learn the hard way that there would be more money and less squawking if taxpayers were treated more fairly.

http://nationalpost.com/opinion/john-ivison-canadas-wealthy-may-have-started-a-tax-revolt-and-ontario-is-the-first-to-notice

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