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.
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.
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.