Question

Tax System and Tax Policy: Taxation of High Incomes

1)     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?

2)     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.

o    How much of the mechanical revenue gain disappears because of a behavioural effect?

o    What are the revenue and mechanical effects per tax filer?

o    Why is the elasticity of taxable income important?

·       What might explain these differences

o   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?