The $4 Billion Hole in Ottawa's Tax-the-Rich Plan - C.D. Howe Institute

TORONTO, Dec. 3, 2015 /CNW/ - Ottawa's plan to shift the tax burden more to the very top income earners could cost federal and provincial governments $4 billion in lost tax revenue, according to a new C.D. Howe Institute report. In "Shifting the Federal Tax Burden on the One-Percenters: A Losing Proposition," author Alexandre Laurin assesses the all-in costs of the plan, taking into account the experience of other jurisdictions and the findings in economic literature.

"The new government in Ottawa has committed to increase the tax burden on the richest 1 percent of earners and redistribute the proceeds by reducing the burden on middle-income earners," says Laurin. "The Liberal election platform said that these changes would be more or less revenue neutral, however we estimate the federal tax changes could result in national tax receipts falling short of commitments for both federal and provincial levels of government by more than $4 billion, meaning higher taxes elsewhere, unplanned spending cuts, or larger increases in government debt," he adds.

Very high-income taxpayers have been found to be more sensitive than others to tax rate hikes. The reason: high-income earners find ways to reduce taxable income, leading to a shrinkage in the tax base. Using a measure of behavioral response consistent with a large body of recent economic literature, the paper estimates that the high-income tax rate could bring in less than $1 billion in revenue for the federal government, well short of the new government's expectation of $2.8 billion, as set out in its electoral platform. Critically, the same shrinking of the tax base would cost provincial governments an estimated $1.4 billion in revenue.

The report recommends that instead of raising income taxes on high-income earners, the federal government could explore other progressive, but less economically damaging, ways of raising revenues to pay for the middle-income rate reduction. One option already envisaged by the new government would be to eliminate tax preferences targeted to high-income earners. Another would be to eliminate or to reform the small business tax deduction to better target younger firms rather than all firms that are small, including incorporated professionals.

Laurin finds that if the government proceeds with the proposed tax hike as is, prudent budgeting with respect to behavioural responses would be in order. "Markets and taxpayers tend to prefer positive budget surprises to negative ones," he concludes.

For the report go to: https://www.cdhowe.org/shifting-federal-tax-burden-one-percenters-losing-proposition

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. It is Canada's trusted source of essential policy intelligence. Distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review, it is widely regarded as Canada's most influential think tank.

SOURCE C.D. Howe Institute

For further information: Alexandre Laurin, Director of Research; or Craig Alexander, Vice President of Economic Analysis, C.D. Howe Institute; 416-865-1904, or email: amcbrien@cdhowe.org.

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