Taxing the Rich

CanWest ran a good summary of my study for the CCPA, “Why Charity Isn’t Enough: The Case for Raising Taxes on Canada’s Rich” released today.  (pasted in below) Adding to Marc Lee’s recent work on tax incidence, my piece documents  the fact that recent changes to personal income taxes in Canada have compounded rather than offset increased ‘top tail’ driven market income inequality, ie the increased pre and post tax income share of the top 1% and higher. I also make the point that a progressive personal income tax is an important redistributive tool in Canada if we we want to equalize after tax/transfer incomes. Neo liberal countries like Canada and the US rely on the tax lever relatively more as a redistributive tool than do most European countries, which equalize relatively more through transfers. I further argue that we need progressive taxes to stop the very top from growing away from the middle and the bottom, while the primary role of transfers is to raise the bottom end of the income distribution towards the middle.

 

The full study is available at

 

http://www.policyalternatives.ca/documents/National_Office_Pubs/2007/Why_Charity_Isnt_Enough.pdf 

http://www.canada.com/montrealgazette/news/business/story.html?id=4afbc36b-8d10-4264-93ad-078710abfe22

Tax wealthy Canadians more heavily, think tank suggests

Levels on very high incomes should move into line with United States, report urges

ERIC BEAUCHESNE
CanWest News Service

The federal government should bring its taxes on upper-income Canadians more into line with those in the U.S. by raising them, a left-leaning economic think tank says in a report issued today.

“One can expect reactions of outrage from the very affluent and claims it would drive our talented CEOs and other stars to the U.S.,” acknowledged the report by the Canadian Centre for Policy Alternatives.

“Hidden within these threats, however, is a little known but important fact: federal personal income tax rates on very high incomes in the U.S. are actually higher than in Canada.”

The report calls for an increase in Canada’s top federal personal income tax rate and the taxation of all capital gains to help narrow what other studies, including by Statistics Canada, have found to be a widening gap between rich and poor in Canada.

“Canada’s top federal tax rate is considerably lower than the U.S.,” said the report, prepared by Canadian Labour Congress economist Andrew Jackson, which noted that the top U.S. tax rate is 35 per cent on incomes over $326,000 and 33 per cent on incomes higher than $150,000 while Canada’s top federal income tax rate is 29 per cent on incomes of more than $116,000.

It calls for a new higher federal tax rate of 31.5 per cent on incomes of more than $250,000, and full taxation of all capital gains, 43 per cent of which it said go to people earning $250,000.

The higher income tax rate would boost federal revenues by $1 billion a year, while the taxation of all capital gains would raise $1.8 billion, giving the government nearly $3 billion a year more to spend on social programs and public infrastructure, it says.

David Perry, an analyst with the Canadian Tax Foundation, a taxation research organization, said that while Canada’s top federal tax rate is lower than the top rate in the U.S., it kicks in at a lower income level.

The big difference, however, between how Canada and the U.S. tax the wealthy, Perry said, is that the U.S. has an inheritance tax and Canada doesn’t.

The study by the Canadian Centre for Policy Alternatives cites a 2006 Environics poll indicating that 82 per cent of Canadians support closing tax loopholes for wealthy individuals, and 70 per cent increasing tax on the wealthy, as a way to reduce the growing gap between the rich and the rest of Canadians.

“Instead of continuing to deliver more tax cuts to the rich in the name of competitiveness, Canada should make sure that the wealthy contribute their fair share in taxes,” Jackson said.

The study charges that income inequality is growing rapidly, with Canada’s richest one per cent taking home an increasing share of pre-tax income, and also being given a disproportionate share of recent income tax cuts.

“This is disturbing because a progressive income tax is a particularly important way to promote fairness in the North American context, and because only higher tax rates for the very rich can stop that elite group from growing away from the rest of society,” Jackson said.

10 comments

  • Congratulations, Andrew. This is an excellent overview of recent empirical studies, and a persuasive case that we can and should increase top income taxes and use the proceeds to ensure better life chances for everyone.

  • By my count, versions of Beauchesne’s story were printed in eight CanWest papers today, including the Montreal Gazette and Vancouver Sun. Great work!

  • The lack of an inheritance tax in canada also creates a massive loop hole for the preservation of inequality through time. In this regard the US is more progressive too.

  • Much ado is often made about the fact that Canada does not have a US-style inheritance tax. But my understanding is that taxes must be paid on realized capital gains upon death, so this is a de facto inheritance tax, though perhaps not at as high a rate as we might like.

  • Although I am not particularly familiar with the mechanics of the US inheritance tax, I think that it applies to a much broader range of accumulated wealth than just realized capital gains. Decades ago, Canadian provinces had estate taxes.

  • An inheritance tax would presumably include a tax on the principal residence so it does differ from capital gains payable at death.
    Inheritance tax was a liberal idea. All should start equal, not some on third base. As a socialist I am pleased to agree with liberals when the occasion arises, and regret that it doe not occur more often.
    Andrew and Marc are laying out the basis for a federal fair shares campaign by the NDP. Wealth taxation, along the lines proposed in the past by the AFB should be a big part of it.

  • From Wikipedia re the US Inheritance Tax: For a person dying during 2006, 2007, or 2008, the “applicable exclusion amount” is $2,000,000, so if the sum of the taxable estate plus the “adjusted taxable gifts” made during lifetime equals $2,000,000 or less, there is no federal estate tax to pay. According to the Economic Growth and Tax Relief Reconciliation Act of 2001, the applicable exclusion will increase to $3,500,000 in 2009, the estate tax is repealed in 2010, but then the act “sunsets” in 2011 and the estate tax reappears with an applicable exclusion amount of only $1,000,000 (unless Congress acts before then). The tax is levied at a rate of 45% over $1.5 million.

  • Andrew, one quick question: the gains by the top 1% is of course well-documented – but the top 1% starts at around $500k/yr. Why not set the new tax rate to kick in there instead of at $250k? It could even be higher than 31.5%.

    Other than that, I agree that this is the sort of proposal that we should be looking at.

  • On Duncan’s point, the Jurist has assessed tax cuts in relation to the next federal election.

  • In response to Stephen, since CRA regularly publish data for those making more than $250k, it is possible to precisely calculate and update the revenue impact of a rate increase. I have no objection in principle to an even higher rate at the very high end.

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