National Post (Latest Edition)

Has tax re­volt al­ready be­gun?

Rev­enues down in a grow­ing econ­omy

- JOHN IVISON IN OTTAWA Finance · Taxes · UK News · Canada News · Income Tax · Fraud · Business · White-collar Crime · Crime · Ottawa · New Brunswick · Donald Trump · California · Hawaii · United Kingdom · Quebec · Government of the United Kingdom · Tax Credit · Corporate Tax · C. D. Howe

Last week’s On­tario fis­cal up­date may have yielded the tax equiv­a­lent of a but­ter­fly mov­ing its wings in one ju­ris­dic­tion and caus­ing a tor­nado in another.

The up­date re­vealed that per­sonal in­come tax rev­enues in the coun­try’s largest prov­ince were down­graded to come in nearly $2 bil­lion lower than fore­cast in the spring bud­get, de­spite an up­grade in pro­jected eco­nomic growth.

No ex­pla­na­tion was of­fered for this un­usual set of cir­cum­stances — tax rev­enues should rise in a grow­ing econ­omy — but the sus­pi­cion is that high-earn­ing Cana­di­ans are fed up see­ing more than 50 cents on ev­ery dol­lar they earn over $ 200,000 taken by the tax­man. In short, they are be­hav­ing as all the stud­ies on the sub­ject pre­dicted they would — they are in­creas­ingly en­gaged in what is known eu­phemisti­cally as “tax plan­ning.”

Alexan­dre Lau­rin, re­search di­rec­tor at the C. D. Howe In­sti­tute, fore­cast just such a re­sponse two years ago when the Lib­er­als en­acted their tax plan. In their plat­form, the Trudeau Lib­er­als said they would pay for their planned mid­dle- bracket tax cut by ask­ing the wealth­i­est “to give a lit­tle more.”

A new tax bracket of 33 per cent was in­tro­duced for those earn­ing more than $200,000. As a re­sult, the fed­eral govern­ment saw its per­sonal in­come tax rev­enues dip by $1.2 bil­lion for 2016-17, as the gains from the in­creased top bracket failed to cover the cost of low­er­ing the mid­dle band and peo­ple scuttled to avoid pay­ing the new tax.

The prob­lem is that the prov­inces have been rais­ing their rates too. Ottawa’s in­crease pushed com­bined fed­eral/pro­vin­cial top rates in six prov­inces over 50 per cent.

New Brunswick is high­est, with a top com­bined rate of 58.75 per cent, fol­lowed by Nova Sco­tia at 54 per cent, On­tario at 53.33 per cent (in­clud­ing the pro­vin­cial sur­charge), Que­bec at 53.3 per cent, P. E. I. at 51.37 per cent and Man­i­toba at 50.4 per cent.

By con­trast, Pres­i­dent Don­ald Trump is propos­ing to lower in­come taxes for many Amer­i­cans by re­duc­ing the num­ber of brack­ets from seven to four. The top rate would re­main at 39.6 per cent for those earn­ing more than US$ 500,000 but, even then, only Cal­i­for­nia and Hawaii would have com­bined rates above 50 per cent.

Econ­o­mists have l ong warned that a mar­ginal rate of 50 per cent is a psy­chol og­i­cal t hresh­old t hat , if crossed, per­suades tax­pay­ers to take eva­sive ac­tion to min­i­mize their tax li­a­bil­ity.

Lau­rin looked at the be­havioural re­sponse in the U.K. and even Que­bec.

In 2009, the Bri­tish govern­ment raised its top rate of in­come tax to 50 per cent, but it was forced to re­verse it­self and re­duce the rate to 45 per cent af­ter a pub­lic back­lash.

In Que­bec in 2012, the new govern­ment en­vis­aged a com­bined fed­eral/ pro­vin­cial rate of 55 per cent for top earn­ers, but the ex­o­dus of tax­pay­ers to On­tario pro­moted a par­tial back­track, lim­it­ing the in­crease in the top rate to 50 per cent.

In his anal­y­sis, Lau­rin es­ti­mated the shrink­ing tax base would hit pro­vin­cial gov­ern­ments par­tic­u­larly hard, since they would not ben­e­fit from the rev­enues gen­er­ated by rais­ing the top rate.

That seems to be ex­actly what has hap­pened.

No de­tails are pro­vided on the shock­ing de­cline in On­tario’s in­come tax rev­enue but Lau­rin said it was ob­vi­ously a sur­prise that the num­bers came in lower than ex­pected.

“A lower base in 2016 will trans­late into lower rev­enues in 2017 as well, since rev­enues are grown from a lower base,” he said. “For 2017-18, this is about a fiveper-cent un­ex­pected per­sonal in­come tax rev­enue short­fall, which is huge. Since no ex­pla­na­tion is pro­vided, tax plan­ning is the likely cul­prit.”

It’s not yet clear whether the phe­nom­e­non of lower in­come tax rev­enues in grow­ing economies is widespread and sus­tained — Nova Sco­tia saw a mar­ginal dip in in­come tax re­ceipts last year be­tween es­ti­mated and ac­tual re­turns.

In its re­cent fis­cal up­date, Ottawa was bullish about per­sonal in­come tax, fore­cast­ing in­creases av­er­ag­ing 4.4 per cent an­nu­ally — a rosy view of the econ­omy that jus­ti­fied new spend­ing of $1.8 bil­lion this year. That op­ti­mism was pre­sum­ably en­cour­aged by the govern­ment’s plan to clamp down on use of pri­vate cor­po­ra­tions as tax shel­ters — a plan that, if now aban­doned, is likely to re­sult in sig­nif­i­cant in­come tax seep­age.

The On­tario fis­cal up­date sug­gests that the tax­able base may have shrunk al­ready, which will likely mean re­duced per­sonal in­come tax rev­enues at all lev­els of govern­ment.

Ottawa and the prov­inces may learn the hard way that there would be more money and less squawk­ing if tax­pay­ers were treated more fairly.

 ?? SEAN KILPATRICK / THE CANA­DIAN PRESS ?? Prime Min­is­ter Justin Trudeau’s govern­ment’s pol­icy of rais­ing taxes for those earn­ing over $200,000 has snow­balled into higher over­all rates.
SEAN KILPATRICK / THE CANA­DIAN PRESS Prime Min­is­ter Justin Trudeau’s govern­ment’s pol­icy of rais­ing taxes for those earn­ing over $200,000 has snow­balled into higher over­all rates.
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