Neil Reynoldsâ€™ Fuzzy Tax Math
If you need help with your tax return, donâ€™t ask Neil Reynolds. His latest attack onÂ the New Democrat proposal to collect modestly more tax from Ontarioâ€™s super-rich stated that â€œthe provinceâ€™s highest marginal rate on personal income would rise, federal and provincial rates combined, from 46.4 per cent to 49.4 per cent â€“ meaning that this rate would theoretically net $247,000 in revenue.â€
The New Democrat proposal would actually produce a top combined marginal rate of 49.5%. (Reynolds got this figure right in his prior column on the subject.)
As far as I can tell, Reynolds arrived at $247,000 by multiplying $500,000Â and 49.4%, treating a top marginal rate as though it were a flat or average rate. In fact, the New Democrat proposal would apply only to income in excess of $500,000. Taxes on the first $500,000 would not change.
One has to wonder whether similarly fuzzy math underlay Reynoldsâ€™ previous claim: â€œPeople who make more than $500,000 already work full-time for the state (federal, provincial and municipal) for perhaps eight months a year.â€
An Ontarian with $500,000 of taxable income and only the basic personal credits in 2011 would pay $133,325 of federal income tax (($500,000-$128,800)*29%+$27,256-$10,527*15%), $52,273 of basic provincial income tax (($500,000-$75,550)*11.16%+$5,364-$9,104*5.05%), $26,578 of Ontario surtax (($52,273-$4,078)*20%+($52,273-$5,219)*36%) and $900 of Ontario health premium.
So, the maximum income tax payment on $500,000 is $213,076. Of course, Reynoldsâ€™ claim of eight months of servitude also includes property tax and HST.
If our imaginary rich guy owned a $5-million mansion in Toronto, he would pay property taxÂ of $39,646 ($5,000,000*0.7929218%). If he somehow managed to spend all of his after-tax income on goods and services subject to HST, he would pay $28,448 of HST ($500,000-$213,076-$39,646 =$247,278=$218,830*1.13; $247,278-$218,830=$28,448).
These extreme assumptions would bring his total tax payments to $281,170 ($213,076+$39,646+$28,448). Thatâ€™s 56% of taxable income, which corresponds to below seven of twelve months.
The same calculations for an Ontarian with a million dollars of taxable income and a $10-million mansion produce a total tax bill of $579,129 ($445,124+$79,292+$54,713). Thatâ€™s 58% of taxable income, which is still below seven months.
The New Democrat proposal would not affect the first rich guy. But it would increase the even richer guyâ€™s taxes to $592,935 ($460,724+$79,292 +$52,918), 59% of taxable income or just over seven months.
Thanks Erin, however I think it would also be important for you or another blogger to address his main argument, ie. that there is no net effect to such tax increases, due to increased tax avoidance. Is this simply inaccurate, even in Britain? If not, is the Ontario context sufficiently different that this should not be a concern? If not, what additional measures should be proposed to prevent this from happening?
Personally, my answer to that one is political. First, if it were really true that charging the rich higher taxes didn’t actually cause them to pay higher taxes, they wouldn’t squeal so much every time we try. Second, if it were really true, the new rate also wouldn’t do any harm, so there’s no reason not to give it a shot and see if revenues increase.
This is one of those cases where one excuse would be stronger than two. “They won’t pay it, so it’s pointless” is an argument. “It’s an unjust imposition on people already paying lots” is an argument (if a very weak one). “They won’t pay it but it’s an unjust impostion which would cause them hardship” is incoherent.
There was a March publication by Jeffrey Thompson from UMass Amherst that looked at some of this stuff. I’ve only read summaries, but it appears to indicate you do get an increase in revenue, even after the behavioral changes. Another one I didn’t read in detail was Diamond & Saez, from some time last year. My recollection was that they accounted for changes in behavior and ended up with a revenue maximizing top marginal rate up around 70%.
The behavioural response issue was discussed extensively here:
Kevin Milligan’s numbers seem to indicate that the ONDP estimate of the revenue to be raised is on the high side of plausible.
Reynolds’ columns typically include so many inaccuracies and falsehoods that it could be a full-time job just pointing them out.
For instance, his column of April 10 stated that Ontario doesn’t have figures on those making more than $500K. I have these figures myself and so I assume the Ontario government does as well.
In terms of the behavioural effect for the 50 p rate, not only was there lag time before it was took effect, but it was also seen as a temporary measure, particularly once the Conservatives were elected. As a result it led to a large amount of tax shifting, not only to the previous year, and to other forms of income, but there will also be stalling of income to the current year in anticipation of it being cut.
The IFS study looked at some of these impacts, but not all of them.
It’s important to distinguish between real reductions in income and tax shifting behaviour, where the income is shifted to other bases and turns up as revenue in other areas. Of course Neil Reynolds ignores that.
I haven’t seen much acknowledgement of the difference between real and tax shifting impacts from Canadian academics such as Milligan, Gordon and others in their critiques of high income taxes, even though Slemrod and Saez discuss it extensively.
The lesson from this is that it’s important to consider the tax system as a whole system, otherwise tax loopholes, tax shifting and avoidance will create expensive holes and a lot of money spent in wholly unproductive tax avoidance activities. Critical to this is also raising rates on corporate income so they are closer to PIT rates, eliminating tax loopholes for capital gains, stock options, etc, and clamping down on tax havens.
Strongly agreed, mr. Sanger.
“I havenâ€™t seen much acknowledgement of the difference between real and tax shifting impacts from Canadian academics such as Milligan, Gordon and others in their critiques of high income taxes, even though Slemrod and Saez discuss it extensively.”
Hi, I mention this in every interview I have given on the topic. The evidence for real responses (labour supply, investment decisions, residency) for high earners is that the responses are small. The evidence for shifting is much more tangible.
Concerns that ‘wealth creators’ will flee are entirely overblown. Concerns that 500K+ guys will readjust their affairs to lower their tax bill are justified.
It is reasonable to advocate for a simpler, less-loopholey tax system. That would indeed lower the scope for behavioural response.
Oh, and I completely agree with Erin that Neil Reynolds’s numbers are very flawed.