As a simple matter of fairness in challenging economic times, it’s hard to argue with the populist appeal of trying to make the wealthiest people in society contribute what they can afford.
Add to that the threat of losing his minority government, and it’s easy to see why Ontario Premier Dalton McGuinty reluctantly agreed to impose an “NDP surtax” on anyone in the province making $500,000 or more, effectively creating a new top tax bracket. Still, experts on tax policy say it’s unlikely the measure will bring in all of the $440-million to $570-million that Mr. McGuinty and NDP Leader Andrea Horwath say it will.
Time will tell, but here are a few things to keep in mind about the surtax:
Marginal tax rate
Kevin Milligan, an expert on the economics of public finance who teaches at the University of British Columbia, noted that the top marginal tax rate in Ontario would climb to 49.5 per cent once the 2-per-cent surtax is fully factored in. This means it would still be far less than the closer-to-60-per-cent threshold he pegs as the limit before high taxes start driving top earners to leave, potentially costing more in revenue than the higher levy is supposed to generate. “For just a couple of percentage points, leaving the jurisdiction for a lower-tax province would be big upheaval,” he said.
Offsetting a “hit”
More likely, high earners will use accounting tricks, such as deferring some income from one year to the next, to offset their “hit” from the surtax. In his own calculations, Prof. Milligan says, the Ontario surtax only yields an amount similar to what proponents say it will if he assumes no changes in behaviour. “The assumption you have to make to get to revenue levels of like $500-million is that people who have the best tax advice available are not going to take it,” he said. Len Farber, former director general of tax policy at the Finance Department who is now a senior adviser at law firm Norton Rose, put it more bluntly: “The biggest part of the money is going to go to the planners.”
In line with U.S.
The Ontario measure is hardly radical. It puts the province more in line with the United States, where the top federal tax bracket starts at about $380,000, as opposed to Canada as a whole where the top federal rate kicks in at under $130,000. Again, it’s not always clear that boosting tax rates for the highest earners boosts revenue. In the U.K., the top rate was raised in recent years from 45 per cent to 50 per cent, but now there’s talk it will be pushed back down because it hasn’t had the desired effect on revenue.