Taxing high earners is harder than it looks: Quebec edition

Memo to the PQ: there aren’t that many Quebecers in the top-income brackets

(Mathieu Belanger/Reuters)

Imposing higher income tax rates on high earners is one thing; expecting the measure to produce large amounts of new revenue is something else entirely. There are two problems with the idea that increasing the tax rates for high earners is the same thing as generating significant new revenues:

  • There aren’t many high earners.
  • High earners have access to high-quality tax planning advice.

You can add the fact that high earners are mobile, but this is a longer-term, cumulative effect: the number of high earners who leave in a given year will increase slightly, and the number of high earners who arrive will decrease. But the point remains that when governments raise tax rates, high earners will react by finding ways to reduce their tax burden.

One response to this is: “Don’t high earners already do their best to minimise their tax burden? Why would they change what they’ve already put in place?” The answer is that there are a myriad of options available to reduce taxes, each with their own costs. When tax rates are low, some measures are too costly to justify using. But as tax rates increase, the number of cost-effective tax-avoidance tactics increases.

Which brings us to the newly-elected Parti Québécois government’s plan to increase the income tax rates faced by high earners. Readers who are not overly math-averse can check out my long post on Worthwhile Canadian Initiative that works through the arithmetic of dynamic scoring as it applies to the PQ proposal. The basic point is that taking behavioural responses into account reduces estimates for revenues by about half of what you’d expect if you assumed that high earners would passively accept the new rates.

But the point I want to make here is the first one: there simply aren’t that many high-earning Quebecers, relative to the Canadian average:

Even though 24 per cent of 2009 federal tax files originated in Quebec, these accounted for only 16 per cent of tax files reporting total incomes above $150,000. Contrast this with Alberta, where 10 per cent of Canadian tax files accounted for 20 per cent of those earning more than $150,000.

Another way of looking at it is the share of total income going to high earners—this is a measure we’ve been seeing a lot of lately. Here are the income shares for federal tax files; for Quebec, I’ve added the numbers from the provincial tax files.

The share of income going to high earners in Quebec is smaller than the national average and has been increasing more slowly: see here for more, as well as a discussion of how language may explain some of the gap.

There simply aren’t that many high-earning Quebecers to tax. When coupled with the sort of tax-avoiding responses that can be expected of this subgroup, this means that there isn’t much in the way of extra revenue the PQ can extract from increasing tax rates at the top of the income distribution.




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Taxing high earners is harder than it looks: Quebec edition

  1. Daily Telegraph Sept 30:

    If French President François Hollande thinks he can assuage the bond markets by dishing out tax-heavy austerity instead of genuine reform, he has been given very bad advice.

    His tragically-misguided budget offers no strategic plan to reverse — or even to stop — thirty years of slow national decline. He offers no worthwhile measures to slim the Leviathan state, now a Nordic-sized 55pc of GDP, without Nordic labour flexibility or Nordic free markets.

    He does not tell us how he will stem the slide in France’s share of eurozone exports over the last decade, down from 17pc to 13pc, or what he will do about the disastrous swing in France’s trade balance from a surplus of 2.5pc of GDP to a deficit of 2.4pc since 1999.
    ——-
    AEI ~ American Left’s Two Europes Problem:

    A century or so ago, German sociologist Max Weber observed that Protestant countries in northern Europe tended to outperform the Catholic and Orthodox countries in the south of the continent.

    Economists have since largely abandoned Weber’s insights, and in general have turned against “cultural” explanations for economic outcomes. Yet Weber would not be surprised if shown a map of credit downgrades in Western Europe anno 2012. Western Europe can still roughly be divided into a northern, Germanic language, Protestant region, and a southern, Latin/Greek language, Catholic/Orthodox region.

    These two Europes differ both in terms of culture and in terms of social and economic outcomes. France, Italy, Spain, Belgium, Portugal, and Greece have all been downgraded by Standard and Poor’s, sometimes repeatedly. Meanwhile, Germany, the United Kingdom, the Netherlands, Switzerland, Denmark, Sweden, Norway, and Finland all currently maintain the highest credit rating. Southern Europe on average has a debt-to-GDP ratio of more than 100 percent and deficits as a share of GDP of more than 5 percent, while northern Europe is closer to a balanced budget.

    • Sweden is one of the (actual) strongest economies on the planet and it also has among the highest tax rates. Northern European countries didn’t get where they are with reckless tax cuts like the US and Ireland (both over 100% debt/GDP; Japan is also a low-tax train wreck.)

      BTW, in 6 short years Harper turned a 2% GDP trade surplus to a 3% trade deficit (current account.) All the US PIIGS ran big trade deficits before the debt crises hit.

      Harper’s another big tax cutter: slashing taxes by $30B/yr since coming to power.

      He cut corporate taxes by $14B/yr. Canada now has the lowest effective corporate tax rate among all countries listed in the 2012 KPMG Competitive Alternatives report. In its 2008 report, before Harper brought in the tax cuts, we ranked #2.

      Corporations are pocketing the tax cuts instead of investing the money boosting productivity and creating jobs. Productivity growth under Harper is the lowest its been in recorded history. More free-market ideology crashes and burns when put into practice… (If it succeeded at anything I’d sure like to know…)

      • I suppose it doesn’t help that the largest market for Canada’s exports has been in the economic dumper for a decade.

        • The greatest factor has been the soaring bitumen dollar which has become 25% overvalued (according to the OECD.)

          Harper’s response? Who cares? His “action plan” is to throw away our value-added sector and go all-in on resources (because we’re presently in a commodities boom.) What Harper doesn’t understand is that our country is too populous to live off of the avails of resource welfare. He also doesn’t get that Canadians want challenging job and business opportunities closer to civilization…

          The Swiss faced a similar “massive overvaluation” and pegged their currency to the euro. Canada can do the same. (Either that or wages will have to come down by 20% across the board to restore competitiveness to what it was before the dollar became 25% overvalued.)

    • “Sweden is one of the (actual) strongest economies on the planet and it also has among the highest tax rates.”

      I have no idea what you talking about when you say you want to be just like Sweden/Nordic and then go on to disparage the free market system. If I have to pick a socialist model to live under, I would choose the protestant countries of northern europe rather than catholic countries.

      Daily Telegraph ~ Lets Give Toynbee The Britain She Wants:

      We’re all aware of Polly Toynbee, doyenne of the Guardian’s comment pages and conscience of the nation …. I want Britain to aim for the social and economic balance that thrives in Nordic nations ….

      From Denmark we’ll take a couple of policies. Privatise the ambulance and fire services certainly. They’ve been working well there for nigh on 90 years. We’d want their taxation system as well: the national income tax is 3.76% and the top national rate is 15%.

      From all of them we’ll take the abolition of the national minimum wage, for none of the EU Nordics has one. Sweden has also abolished inheritance tax, gift tax and the wealth tax. Those sound like three excellent ideas to copy.

      This is because those countries follow the basic economics of taxation. You need low corporate and capital taxation, moderate income taxation and high taxes on consumption.

      As the OECD helpfully points out, all taxes have deadweight costs. These are economic activity that doesn’t happen because of the presence of the tax.

      http://blogs.telegraph.co.uk/finance/timworstall/100016459/lets-give-polly-toynbee-the-britain-she-wants/

  2. Originally free-market ideologues claimed that tax cuts paid for themselves. The US has gone bankrupt (103% debt/GDP) waiting for imaginary tax revenues to come pouring in.

    Now that they have milked that self-serving doctrine beyond all credibility, their new sales pitch is that reversing some of these tax cuts will fail because the rich will just cheat on their taxes.

    It’s interesting how these kind of economists shift and shape numbers and figures around to suit an agenda. It’s too bad science didn’t work like that or we would’ve created fusion reactors decades ago and solved global warming.

    In any case, in the post-war Keynesian era — before all the reckless tax cutting began — America paid it’s bills: from 135% debt/GDP to 35%. (Canada: from 100% to 17%; now 85%) Countries in northern Europe stuck with the mixed-market system and have among the lowest government debt and the strongest economies.

    Given all the failure and disaster free-market reforms have wrought over the past 30-year “age of greed,” I think it’s time to stop throwing good money after bad ideology and put back in place centrist policies proven to work in the real world.

    • Blah blah blah. It isn’t what anyone wishes, it is reality. Quebec is attempting what hasn’t worked before. They won’t see revenue, economic activity will leave the province. The resource development will diminish. People will be out of work.

      • Oh yeah, just ask a neo-con if you want the reality: tax cuts raise tax revenues; raising taxes lowers tax revenues; gravity causes people to float up into the sky…

        Harper said $14B/yr in corporate tax cuts would raise productivity and “create jobs.” The end result? Corporations are hoarding the tax cuts, 500,000 good-paying export-related jobs have disappeared, and productivity growth is at historic lows.

        Free-marketers in the US said get rid of those pesky banking regulations and it will “create jobs.” The end result? A financial market meltdown and the unemployment rate doubled.

        According to the neo-cons Sweden should have one of the weakest economies on the planet because it has pretty much the highest taxes in the world. The result? It’s economy is booming, it ranks #4 on the WEF Global Competitiveness Index — and it has a third of the debt/GDP that America has (which has the lowest taxes in the developed world. BTW, Canada just fell from #12 to #14.)

        These people have an incredible track record on reality: just listen to what they say; reverse it; then you have reality!

        Why don’t you back up your drivel with some facts? Oh I forgot. Neo-cons don’t need facts, they believe their flaky ideology is reality.

        • You’re leaving out a lot there in the details, and the details are extremely important. It’s an apples vs. oranges thing. I agree that all of the Scandinavian countries have a high percentage of taxes as a percentage of GDP. But the mix is telling. Last time I was in Denmark (a couple of years ago), their VAT (equivalent of our GST) was 26%. In other words, the Scandinavian countries don’t just get where they are on the revenue side by sticking it to rich folks and corporations, which is what a lot of lefties seem to think is The Solution. I’d be interested to know if you think that we ought to jack up our GST to 26% or so. I don’t seem to see that in the NDP policy book, or the Liberal Party Policy book, or the Green Party policy book . . . . do you?

          • “You’re leaving out a lot there in the details, and the details are extremely important. It’s an apples vs. oranges thing.”

            Nonsense. The free-market claim espoused by neo-cons like Harper is that low taxes “create jobs” and prosperity; high taxes destroy jobs and prosperity.

            When one examines the facts, it’s clear this position is ridiculous.

            No doubt most countries in the world have high value-added taxes, which economists tend to favor. That’s why they hated Harper’s boneheaded move to cut the GST tax by 2 points killing $12B/yr in revenue.

            But the reality is that in North America we have been continuously slashing taxes over the past 3 decades from which the only wealthy got a net benefit. This is the reason for the high levels of debt. Considering this unjustifiable policy failed in every object it set out to accomplish (“create jobs,” boost productivity, increase GDP growth, raise tax revenues, etc.) it is time to reverse it and restore the progressive taxation we had previously.

          • I’m going to assume that you were responding to somebody else’s post rather than mine.
            So which of our federal political parties is currently advocating raising the GST Ron?

          • I’m going to assume that you were responding to somebody else’s post rather than mine.

      • Even if this article is 100% correct, they do see increased revenue, just at 50%. of the previous years revenue at the lower taxation revenue.

    • That’s simply not true, whatsoever. High tax countries like France and Germany have huge levels of public debt. Meanwhile, low tax countries in eastern Europe have very low public debt. You’re full of it. Most countries in the world with low levels of debt have low taxes as well. It’s simply absurd to suggest that high tax countries have less debt.

      • I’m not suggesting anything. I am pointing out the facts. If you find the facts absurd maybe you need to rethink your belief system.

        Germany has 82% debt/GDP, France 86%, Canada 85%, the US 103% (2011 IMF.)

        Tax rankings (31 OECD Hi-income countries: lowest taxes, highest rank):

        Germany #18, France #27, Canada #9, US #1

        Bankrupt eurozone PIIGS (100%+ debt/GDP):

        Portugal #10, Italy #28, Ireland #5, Greece #8, Spain #12

        Japan has 208% debt/GDP and ranks #4 in taxes.

        Scandinavian countries (debt/GDP / tax rank):
        Denmark: 46% / #31, Norway: 50% / #26, Sweden: 37% / #30

        So all the bankrupt countries have low taxes, except for Italy. Some of the highest taxed countries have the lowest debt.

  3. Prof Gordon France is in similar state as Quebec, economy wise, and there has been many articles recently in UK press about French people moving to London to work. I have read fascinating stats about rich people and how they move their $$$ around to avoid taxes. One thing that I forgot is that American Government taxes all its citizens, no matter where they live, while most other countries tax people based on residency. Rich Americans can’t escape tax man while other people can just move to a different country.

    I taught english to South Koreans in late 1990s and they were all learning it because it was important ability to have on resume if you wanted to advance your career. Trade is important to Koreans and they wanted to be able to speak english fluently so they could fully participate in world trade and create wealth for themselves. Koreans were not worried about learning english – it was just another skill, like learning computer – and said as long they dreamed in Korean they didn’t care what language they spoke during the day. I wonder how much wealth Quebec misses out on because of their reactionary fears of english language.

    • It’s rather ironic that the French are moving to England over high taxes–wasn’t the situation reversed when the Labour government hiked up taxes on the rich in England? It seems to me that’s why P.G. Wodehouse, with his hefty royalty cheques, relocated to France.

      • Agreed. Likewise the Rolling Stones, and probably other high-earners, back in the 70s. The Stones were away in 1972, while Conservative Edward Heath was PM (sandwiched between two Labour Howard Wilson terms), recording “Exile on Main Street”. Now, it’s pretty easy for a band to move their assets to another country, compared to an industrialist, but it does illustrate the principle.

  4. I am anticipating the day that the IMF will demand a sovereign Quebec sell off Hydro Quebec to the Americans in return for an emergency loan to fund free tuition and $7 dollar daycare.

    The thing about equalization and federal transfers from Canada is that they mostly come without strings. The IMF money always comes with a straitjacket.

    • Neo-cons don’t run the IMF anymore…

      • Banks “run” the IMF. That is how they get their money they stupidly lent back, and collect on their odious debts from taxpayers of countries with politicians who spend other people’s money on social programs to win votes. The IMF is a bank bailout machine which imposes austerity and taxes in return for emergency funds so banks (basically the global 1%) get their money back.

        Pay attention to Greece and Spain and Italy, and soon France. Germany and the Netherlands refuse to be sugar daddies…er suckers, like Alberta is for Quebec.

        Federalism…i.e. a fiscal union, has its advantages.

        • The IMF won’t be doing any such thing. Honestly…you have the strangest view of the world.

          You’re always looking through that Alberta chip.

        • You don’t have a clue.

          According to Wikipedia: “The IMF describes itself as ‘an organization of 188 countries (as of April 2012), working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty.’ ”

          Over the past 20 years, it was largely influenced by American neo-cons based on the Washington Consensus, which has become discredited since the 2008 global economic meltdown.

          It’s also foolish to think France is going to need a bailout. It has 86% debt/GDP, which is only one point higher than Canada’s. (Germany has 82%.)

          Also when it comes to social spending, Germany spends higher than all the bankrupt US PIIGS (OECD ranking):

          Germany #6
          US: #25
          Portugal: #10
          Italy: #8
          Ireland: #24
          Greece: #12
          Spain: #11

  5. There aren’t many high earners.
    High earners have access to high-quality tax planning advice.
    You can add the fact that high earners are mobile

    I think there’s another one… people are less likely to become high earners. Why bust your ass for another dollar if the government will take 75% of it? Maybe you’d choose to do something else instead that doesn’t increase your income but provides more rewards, like charity work. Some of those high earners will simply stop earning. Higher earners in Quebec will pay 60% marginal income tax, plus 15% sales tax on the remaining 40%, for a total of 66%. Throw in the fact you’re paying gas taxes, liquor taxes, car taxes, property taxes of several thousand for a few more percentage points, some of which you could do away with if you earned less.

    Or here’s another one: it’s harder to remain a high-earner when you’re losing more of it. The money you can save and invest helps you to remain a high earner.

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