April 23, 2012 - In a new column for iPolitics, MLI's Jason Clemens discusses tax fairness and the reality of the current tax distribution. Full column below:
An incomplete picture of tax fairness
By Jason Clemens, iPolitics, April 23, 2012
The Ontario NDP's proposal for a new tax on those earning more than $500,000 coupled with President Obama's ongoing push to create a new minimum tax for those earning more than a million (Buffett tax) have again brought the perpetual issue of tax fairness to the fore. Unfortunately, both proposals are rooted in crass politics and class envy while ignoring the reality of the current tax burdens. Sound policy rarely emanates from such tenuous beginnings.
One of Canada's biggest economic challenges is our personal income taxes, which remain uncompetitive due to both relatively high rates as well as the comparatively low levels of income at which they apply. This is particularly true when we compare ourselves to our southern neighbours. The top federal income tax rate in Canada, for instance, begins at $132,406 while the corresponding top rate in the U.S. applies to income over $373,650 (U.S.).
The priority for tax relief, once budgets are balanced, is to both reduce marginal personal income tax rates while increasing the income thresholds at which they apply. Unfortunately, proposals like the Ontario NDP's do not increase the threshold for the top tax rate but simply impose additional tax rates. Such policies do nothing positive to improve incentives for investment and entrepreneurship nor do they make Canada more competitive internationally.
The only objective measure of fairness is the share of taxes paid by one group relative to the amount of income that group earns. Once we move beyond requiring that a particular group bear a tax burden proportional or proximate to their share of income, we force ourselves to rely on subjective measures of fairness, which we can basically only argue about.
The debate on new taxes for high-income earners based on fairness completely ignores the state of current taxation. Advocates assert that the current system is unfair and needs to be resolved by imposing new taxes on the affluent. Facts, rather than assertions and opinions, are required if we are to improve tax policy.
Based on Statistics Canada's model of tax distribution, the top 20 percent of earners in Canada accounted for 46.8 percent of cash income and paid 54.4 percent of total taxes. In other words, their proportional tax burden is 16.2 percent higher than their proportional income.
On the other hand, the bottom 20 percent of earners had 4.7 percent of income against 2.0 percent of total taxes. This pattern of having a higher share of income than taxes paid holds for all income groups except the top 20 percent.
The argument that the top 20 percent is not paying their "fair" share of taxes is simply not borne out by the statistics. Rather, proponents of new taxes on the wealthy are arguing that the tax system is not progressive enough. The descriptor "enough" is critical in this debate since, again, there is no objective way for us to evaluate how much is enough. We can only conclude from the data that the current system imposes a heavier tax burden on higher-income earners relative to low and middle-income earners.
Interestingly, the burden imposed on the top 20 percent is even more pronounced in the United States. According to the Tax Policy Center in the U.S., the top 20 percent earned 54.6 percent of income and paid 69.7 percent of total federal taxes. The bottom 20 percent, on the other hand, earned 3.7 percent of income and paid 0.2 percent of taxes. Again, the same pattern holds in the U.S. whereby 80 percent of earners have a proportionately higher share of income and a proportionately lower share of taxes. Only the top 20 percent are required to pay taxes in excess of their relative share of income.
These results do not comport with the general perception that the rich are not "paying their fair share". While polls show strong support for new taxes on the affluent in both Canada and the U.S., respondents more than likely don't ever expect to have to pay those taxes (i.e., the survey is asking whether they support someone else paying higher taxes) and the polls almost always ignore the adverse economic effects of such taxes.
While demanding that the rich pay more might make for good sound bites and even better politics, it does not reflect the reality of current tax burdens nor does it constitute sound tax policy. As Canada and the U.S. remain mired in slow economic growth, both countries would be well served by our leaders spending more time focusing on how to grow our incomes faster and improve our economies rather than suggesting new ways to redistribute existing income.
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