A federal tax increase on the top 1% of earners in 2016 resulted in $1.2 billion in additional revenue for the federal government but it resulted in about $1.3 billion in lost tax revenues for the provinces, according to a report published Thursday by Toronto-based C.D. Howe Institute.
Those estimates, which are based on new data from the Canada Revenue Agency, suggest that taxpayers likely responded to the hike by taking action to limit their tax bills, such as choosing leisure over more work, or more aggressively tax planning, the report suggests.
“The bottom line is that high tax rates may discourage earning additional income, and may encourage shifting taxable income to different forms, times and jurisdictions, so they may not only negatively affect the economy, but add little to, or even reduce, government revenues,” the report states.
Indeed, the report estimates that the tax increase likely generated about a third of the revenue that would have been raised without taxpayer action, and the resulting erosion of the tax base ultimately eclipsed the federal revenues raised.
“Many commentators warned that high-income taxpayers would react to the hike by reducing their earned income or engaging in tax avoidance. Preliminary data bear out these predictions,” says the author of the report, Alexandre Laurin, director of research at C.D. Howe, in a statement.
In response to these findings, the report recommends that the tax system should be tightened up, “to make tax avoidance harder and improve tax revenues in future.” At the same time, Canada should consider cutting taxes on high earners.
“A small reduction to the top tax rate would cost little federally, while provinces could enjoy a windfall because of its positive impact on the taxable income base,” the report states.
“Alternatively, doubling the income threshold at which the top tax rate applies would reduce Canada’s disadvantage with America — and, in the same vein as above, create a revenue windfall for cash strapped provinces.”