There are efficiency trade-offs in asking high-income earners to pay higher and higher tax rates, writes Sean Speer. Instead, we should expand the potential for economic opportunity to all Canadians, including focusing on low-income Canadians who need our help the most.
By Sean Speer, May 12, 2017
The core of our politics is headier than we often appreciate. There is, of course, a tendency to focus on manufactured conflict or superficial “scandals” or newfound grievances or identity politics. But beneath these surface-level distractions are big societal questions about values, preferences, and how we govern ourselves.
The political argument today is no different. It turns on the two polar values of western political thought: freedom and equality. Both are important. They are always in tension and always being adjusted.
Ottawa’s admonition that the top 1% of tax filers ought to pay “their fair share” is partly a manifestation of this fundamental debate. It reflects tensions between basic ideas such as freedom and equality, efficiency and equity, and redistribution and reward. It speaks well of our politics that we can reconcile these issues through compromises in our political system.
The outcome is never perfect or universally accepted. And, of course, it is never resolved in a permanent sense. But it sure beats the alternatives witnessed elsewhere around the world.
A recent MLI study sought to draw on such evidence to contribute to this unremitting policy and political debate.
This does not mean, however, that no evidence can be brought to bear in answering these questions, including who comprises the top-1%, the limits of taxation, and alternative ideas to support broad-based opportunity. A recent MLI study sought to draw on such evidence to contribute to this unremitting policy and political debate.
The analysis will not bring finality to the debate or persuade those with intractable positions. But, at the very least, the goal is to force both sides of these questions to confront basic facts and evidence and challenge them to respond. The ultimate result may be that we discover we are closer to a middle ground than one would think based on political rhetoric and conflict.
It is certainly needed. The study comes at a political moment when the balance seems to be shifting towards higher and higher taxes on high-income earners. The political fecundity of the prime minister’s “fair share” message would certainly suggest so. That we now have high-income earners facing marginal tax rates in excess of 50 percent in 6 of 10 provinces is another sign. And the potential for an importation of populist politics from elsewhere may mean that further tax hikes are to come.
Thus the paper’s key findings, which draw from Statistics Canada data and empirical studies from Canada and elsewhere, seek to contextualize these trends and the politics that underpin them.
Who are the top 1%?
The top 1% is often described by politicians and pundits in the abstract. The people in this group are faceless and nameless, and rarely seen as employers, philanthropists, or community leaders. This inattention to who they are, where they live, what they do, and their place in Canadian society, is regrettable. It can lead to a disconnect with the rest of the population and risks breeding an “us versus them” mentality.
We draw on 2014 Statistics Canada data to help fill this informational gap in our political debates. Key evidence and findings include:
- The top 1% comprises 268,505 citizens who each earned at least $227,100 per year in total income.
- At 39.9 percent of tax filers in 2014, Ontario is home to the largest share of Canada’s top 1%, though its share has steadily fallen since 2010. Ontario and Alberta combined account for 65.5 percent of Canada’s top 1%.
- The top 1%’s share of national income has fallen since 2006 and was 10.3 percent in 2014.
- The top 1% pays 20.5 percent of total federal and provincial (or territorial) income taxes, with its total share having consistently increased over the past 30 years. The bottom 50% saw their share of income taxes paid fall from 5.0 percent to 4.3 percent over this same period.
- Those who make up the top 1% do not remain static year after year: 27.9 percent join or leave the group each year, while every five years there is a full 48.5 percent change.
Limits of taxing the 1%
A considerable body of research shows the efficiency trade-offs in asking high-income earners to pay higher and higher tax rates. That there may be some who are prepared to accept such trade-offs in the name of equity and fairness does not mean that we should ignore these considerations. It can otherwise lead to a presumption that rising income tax rates are economically costless. This is false.
The study shows that while there is some debate among economists about the extent to which high marginal tax rates influence individual decisions and in turn impose costs, there is no real dispute over the basic premise.
A 2013 literature review highlights a general consensus on the economic costs of high marginal tax rates, including for high-income earners. The study shows that while there is some debate among economists about the extent to which high marginal tax rates influence individual decisions and in turn impose costs, there is no real dispute over the basic premise. The consensus is sufficiently broad to include long-time Republican economic adviser Martin Feldstein and former Obama administration adviser Christina Romer.
There are also limits to how much government revenue such tax hikes will generate as a result of these behavioural effects which can take the form of a less economically productive activities (such as work or entrepreneurship), tax planning, or both.
The jury is still out on whether Ottawa’s new top tax rate will generate as much revenue as the government initially estimated. These are complicated questions with multiple factors at play and, of course, there are thus competing views that hang on nuances regarding differences between national and sub-national taxation and the role of accompanying anti-avoidance measures. But the key point is these technical debates are a matter of degree rather than principle.
A key consideration then for Canadian policy-makers and the general public is the magnitude of costs that we are prepared to accept to achieve greater progressivity and redistributionist goals. This is, in many ways, the core policy question arising the broader debate.
An alternative vision of broad-based opportunity
While political debates freedom and equality and technocratic ones about efficiency and equity are bound to continue, there is scope to secure consensus on a positive vision for inclusive growth that focuses more on equal opportunity than on equalized outcomes.
Expanding the potential for economic opportunity to all Canadians would shift the focus from a zero-sum question of “fair share” to inclusive growth and broad-based opportunity.
Expanding the potential for economic opportunity to all Canadians would shift the focus from a zero-sum question of “fair share” to inclusive growth and broad-based opportunity. It does not mean that we would cease having political fights about these other issues. But it would mean that we could find common ground in the meantime. And, the positive sign is that such a consensus has already taken shape even if it can be obscured by our tendency to inflate political differences.
The Trudeau government has, to its credit, readily adopted a message of inclusive growth and enacted some policies such as the Canada Child Benefit and a new caregiver tax credit that move in such a direction. Incidentally both policies drew from a foundation that had been set by its predecessor.
Of course, there is plenty of work left to do and our paper sets out some policy ideas including related to Indigenous communities, housing affordability, and supporting workers and communities affected by economic dislocation. Progress in these three areas is key to an opportunity-based society in which one’s family circumstances has less of a deterministic effect on his or her future. This is a goal worthy of our politics.
As we pursue this goal, it is important to note, as some rightly have, that a recognition of the limits of taxing the 1% does not necessarily mean that we cannot enhance progressivity in our tax system or shift our tax and transfer system in the direction of greater redistribution.
Recent Canadian research in fact shows that a political focus on the “middle class” (what the report’s authors call our “middle-class obsession”) has led to a diversion of public resources from low-income Canadians to middle-class ones. There are plenty of policy areas – including Old Age Security and public health insurance, for instance – where a greater use of means-testing and targeted programming would ensure that public resources are focused more on those who need help. The result would be more redistribution without higher levels of taxation which could represent a “win-win” across the political spectrum.
Big, philosophical questions about freedom and equality underpin our politics even if we cannot always see it. What can seem like superficial or politicized debate is really about something more substantial. This is far from a problem. It is the essence of the modern political argument.
But while we are arguing about these big ideas, there is room to find common ground on smaller ones that draws from experience and evidence to improve the conditions for broad-based opportunity. We will all be better off for it.
Sean Speer is a Munk Senior Fellow at the Macdonald-Laurier Institute and author of the recent study, Taxing the 1%: The Limits of Redistribution and a Plan for Inclusive Growth.