Ontario is proving that taxing the one per cent works

Despite decades of tax cut rhetoric, you really can ask the rich to pay more taxes. Ontario did, and high-priced talent didn’t flee the province.


 
A row of luxury cars parked during an event in Toronto in 2016. (Shutterstock)

A row of luxury cars parked during an event in Toronto in 2016. (Shutterstock)

After two decades of tax cut orthodoxy, some governments in Canada have begun to revisit how we tax the rich.

Effective in the 2016 tax year, both Alberta and the federal government increased tax rates for high income earners. The federal government also cancelled the regressive family income splitting measure and it reduced the limit for Tax Free Savings Accounts, both of which primarily benefited high-income earners.

We know that the tax system is a powerful tool to decrease income inequality, but recently available data from Statistics Canada help us understand the impact of making Ontario’s income tax system a little more progressive.

In the 2012 budget, spurred on by the provincial NDP, former Premier Dalton McGuinty temporarily increased the income tax rate by two percentage points, to 13.6 per cent, on taxable incomes above $500,000.

MORE: How Kathleen Wynne has Ontario going backwards

The successive Kathleen Wynne government went a step further: in the 2014 budget, it increased personal income tax rates on the top two per cent of Ontario taxpayers. It also lowered the taxable income threshold for the top tax rate from $514,090 to $220,000 and it added a new tax rate of 12.16 per cent on taxable income between $150,000 and $220,000.

To put that in perspective: to join Ontario’s richest one per cent club in 2014, the latest year of available data, your income had to be more than $233,300. So by lowering the income threshold, the Wynne government improved its ability to tax Ontario’s one per cent at a higher rate, increasing the progressivity of the tax system.

Those within Ontario’s richest one per cent club ranked among the most well off in Canada (second only to Alberta). They are CEOs, titans of industry, and members of wealthy dynasties. In 2014, their average income grew to $501,300.

So how did the Wynne government’s income tax changes affect the one per cent? Statistics Canada data provides us with information on the income taxes the one per cent paid both federally and provincially. While we cannot isolate the impact on Ontario’s revenue, looking at the differences between national and Ontario trends provide us with some clues as to the impact.

In Ontario, the average total income of the one per cent grew by 2.5 per cent in 2014 while average federal and provincial income taxes paid grew by 7.2 per cent.

Nationally, with similar average total income growth of 2.3 per cent, average federal and provincial income taxes grew more slowly, by 4.7 per cent.

The faster revenue growth in Ontario suggests that the changes in taxation of high-income earners had a positive impact on government revenue.

MORE: Good times are back in Ontario. Wink, wink. Nudge, nudge.

The share of total personal income taxes paid by the one per cent also rose more quickly in Ontario than it did nationally in 2014. It increased by 0.2 percentage points nationally, from 20.3 to 20.5 per cent of the share of total income taxes paid in 2014. In Ontario, it rose by 0.7 percentage points, from 22.7 to 23.4 per cent of the share of total income taxes paid in 2014.

We used this data to estimate total personal income tax revenue. Our estimates show total personal income tax revenue collected from the richest one per cent increased by 4.3 per cent in the rest of Canada, but it went up by 8.6 per cent in Ontario — double the increase.

The available data doesn’t tell us whether that money went into federal coffers, provincial coffers, or both. And we can’t attribute how much of that increase resulted from the rate and threshold change.

But we do know that the difference in revenue growth rates between Ontario and the rest of Canada (8.6 per cent vs 4.3 per cent) amounts to an estimated additional $745 million in revenue.

To put that number in context, total federal and provincial income tax revenue in Ontario in 2014 was estimated at $80 billion. So the one percenters’ increased contribution in Ontario, as compared to the rest of the country, accounted for one per cent of total income tax revenue in Ontario.

The moral of the story: Despite decades of tax cut rhetoric, you really can ask the rich to pay more taxes. Ontario did, and it didn’t result in a mass migration of high-priced talent out of the province.

Instead, income taxes paid by the one per cent increased faster in Ontario than they did in the rest of the country. This bodes well for the action that the Trudeau and Notley governments have already taken.

It should embolden governments to do more.

The federal government is in the process of reviewing tax expenditures and there is a lot of good policy decision-making potential.

For instance, my colleague David Macdonald has identified the five most regressive federal tax expenditures: pension income splitting, the dividend gross-up, the stock option deduction, credit for partial inclusion of capital gains, and the foreign tax credit.

Those five tax expenditures cost the federal government between $740 million and $4.1 billion each per year but 99 per cent of the benefits from those tax measures go to the richest half of Canadians.

As part of his annual CEO pay review, my colleague Hugh Mackenzie has consistently noted that stock options (which make up a healthy portion of CEO pay) aren’t taxed at the same rate as other income. Given the fact that Canada’s highest paid 100 CEOs make, on average, 193 times more than the average worker, revisiting this tax expenditure would be a good next step in tax reform.

Ontario’s early foray into increasing the progressivity of the tax system seems to working. Time to broaden the net.

 

Sheila Block is a senior economist with the Canadian Centre for Policy Alternatives’ Ontario office.


 

Ontario is proving that taxing the one per cent works

  1. Well of course it works……the govt just has to be careful not to go over the line.

    • It will stop “working” soon. When Morneau disallows most of the advantages of incorporation and family trusts for doctors, dentists and other professionals in the upcoming federal budget, they won’t sit around happily paying the higher tax rates. They’ll either pursue yet more complex and aggressive tax avoidance strategies, or start looking for greener pasture.

  2. People are not leaving Ontario yet because of the housing bubble in Ontario.

    The historically low interest rates and the proximity of the 1% to the nearly free money also means they don’t have to flee immediately, since the nearly free money is mostly deployed in the housing bubble.

    There is also a prevalence of loopholes for the 1%.

    What one is seeing is mainly housing bubble induced revenue growth.

  3. They haven’t hurt because the rich have ways of reducing their taxable income by spreading it across different family members. That’s why any medical, dental or legal professional you meet is incorporated, with that corporation owned by a family trust, with at least the spouse and any adult children named as trust beneficiaries. The income can be spread across multiple family members, thus keeping their incomes below the higher tax thresholds. This strategy is perfectly legal as was affirmed by a Supreme Court decision in 1998.

    Also, dividend and capital gains incomes are taxed at lower rates. Raising tax rates on those most able to take advantage of complex tax strategies raises little revenue and has little effect on those targeted.

    • Well they need some kind of defence against you peasants. LOL

      • It keeps me in business and well compensated sweetheart. I’m not complaining. And you’re right, high income earners do need some defence against absurd marginal tax rates (now over 53% in Ontario for anyone with more than $220K in taxable income). Thankfully they’ve got it.

    • Re tax expenditures:

      – the dividend gross-up
      My understanding is that this is done to compensate for the fact that companies have paid taxes on the money they distribute as dividends. This tax expenditure thus reduces the double taxation of that money. If one wishes to eliminate the dividend gross-up, then it would be reasonable to allow companies to fully deduct dividend payments as an expense.

      – the stock option deduction
      I can’t speak for how this is used for CEOs, etc, but it is heavily used in the high tech industry to attract high-tech employees to startups. The employee works long hours for a company that is not established in the hope that the company will go public one day and all those hours of work in an unstable work environment will result in a large payoff. If one wishes to eliminate the stock option deduction for pre-IPO companies, then one should be prepared for at least some leakage of high-tech workers to the US.

      – credit for partial inclusion of capital gains
      A case can be made for taxing capital gains the same as income, *but* if one does so, then it is only fair that inflation be taken into account when calculating the gain. Without taking inflation into account it’s possible for someone to pay CG tax on a phantom gain. E.g., someone purchases something in 1990 for $10,000, they sell it for $10,100 in 2010. This results in a nominal profit of $100. However, since $10,100 2010 dollars are worth less than $10,000 1990 dollars, thanks to inflation, this nominal capital gain is actually a capital loss. The special tax treatment of capital gains is meant to, in a blunt way, partially compensate for that. Sure, eliminate the special tax treatment for capital gains, but if so, then require gain/loss calculations to use constant dollars; it would be the fair thing to do.

      – the foreign tax credit:
      I do not at all understand a case for eliminating this. It’s purpose is to eliminate double taxation. E.g., a Canadian is temporarily working in a foreign country and paying foreign income taxes. Said Canadian did not sever his Canadian tax residency for various reasons. Since he is still a tax resident as far as Canada is concerned, he pays taxes on this foreign income. However, the FTC allows him to credit his Canadian taxes owed with the foreign taxes paid. So, without the FTC, he would be doubled-taxed on this income. The same sort of thing occurs with resident Canadians buying and selling foreign property – without the FTC they would be double-taxed on any capital gain.

      Usually articles that bring these tax expenditures up refer to them as ‘tax loopholes’ (and the referenced article does just that), implying that they are somehow being used in ways they were not designed for. These expenditures exist for a reason, and whereas that’s not a reason to not modify, or even eliminate, them, it is a reason for giving careful consideration when contemplating changes.

      • I didn’t mean to respond to Mud Baller’s post, but since I accidentally did, I’d add that I, in my albeit limited understanding, agree with his criticism of how incorporating is (mis)used by lawyers, doctors, etc. I know someone who does exactly what he describes.

        • Can you explain how incorporating is misused by doctors and lawyers? Doctors and lawyers are running small businesses. They have all of the same risks as any other business – unlike an employee, they have a lot of liability. They are on the hook for leases, for severance payments when terminating employees, etc. Why should their business be treated differently by the tax man than any other business?

          • Simple. Justin and his state planners need the money. You can imagine how frustrated they are to raise the top rate from 29 to 33%, only to realise that many highly paid professionals already had I place easy ways to avoid it, so that the increase would not pay for even half of their “middle class tax cut”, much less pay for their nation building dreams.

            It’s got nothing to do with use or misuse. Justin’s got big ideas and needs more money. He was voted in on that very sentiment.

  4. I liked the sound of the articles headline. I’m quite suspicious of the rich flight argument… but on closer inspection, a lot of the facts that seem manipulative to me. The key facts relied upon about the rich are paying higher taxes without a comparative or context seems like the writer is trying to avoid some causation arguments. Right-wing libertarians, or far-leftists could use the same facts and spin them… Without context or comparatives, the facts relied upon just don’t mean that Ontario and Wynne are doing a good job. Secondly, a list of tax expenditures that benefit the “upper half” seems to me silly criteria but it seems like the rest of the commenters have caught on to that. Maybe I shouldn’t be so hard on Macleans for at least trying to write on tax policy… but to suggest Ontario deserves to pat itself on the back is terribly irksome.