Worthwhile Canadian Initiative is giving policy advice to a Canadian left-of-centre party (the NDP) in an ongoing series - the first four entries:
While the policies are given in the Canadian context, the general economic principles apply equally as well to the United States and most developed countries, and as such are worth reading even if you are not Canadian.
Of the four policy proposals listed above I am particularly interested in the idea of adding another income tax bracket to very high income earners (the top 0.1% of earners in the country). While it may be popular, quick back-of-the-envelope calculations suggest that it will accomplish little.
The Canadian labour force contains a bit over 18 million Canadians (source). A tax on the top 0.1% of income earners would affect roughly 20,000 Canadians.
Based on the figures provided by Worthwhile Canadian Initiative, I (roughly) estimate the amount of income required to be in the top 0.1% is $600,000 a year. A very rough estimate of the average income of earners in this group is $1,600,000 a year; the actual amount could be anywhere from $1,000,000 to $3,000,000 I figure.
Thus a marginal tax bracket that only applied to those 20,000 people would start at $600,000 and on average apply to $1,000,000 in income (the difference between $1,600,000 and $600,000). A person in Ontario already faces an over 40% marginal income tax rate on that income (A 29% federal rate plus a 11.16% provincial rate - source).
You could only raise this rate so far before serious issues with tax evasion and tax avoidance takes place. I do not believe you could get this rate much past 45% (total), but let's suppose for the sake of argument we could raise it to 50%. An additional 10 percentage points in income tax rates for incomes rising above $600,000 would generate an additional $2 billion in government revenue, if you assume that income levels would remain unchanged. (The $2 billion figure is calculated by 20,000 persons * ($1,600,000 - $600,000) * 10% )
However, behaviors would change greatly - through tax avoidance - high income Canadians could move to the United States, convert labour income into investment income, substitute labor for leisure or through outright tax evasion. At these high levels of income I would estimate even in the best case scenario 25% of this revenue would be lost, knocking this $2B in revenue down to $1.5B. My guess is that, in reality, the losses would be well over 50%.
In 2009 Canadian government revenue is expected to be around $237B (source), so $1.5B would represent a 0.6% rise in tax collections - and in my view the $1.5B is a best case scenario. The extra $1.5B would not go particularly far in increasing social programs or transfers to the poor. It seems hardly worth it given the large potential for unintended consequences and the fact that high taxes reduce economic growth (see: The Effect of Income Taxes on Economic Growth). There would seem to be much more effective ways of reducing inequality in our society.
Of the four policy proposals listed above I am particularly interested in the idea of adding another income tax bracket to very high income earners (the top 0.1% of earners in the country). While it may be popular, quick back-of-the-envelope calculations suggest that it will accomplish little.
The Canadian labour force contains a bit over 18 million Canadians (source). A tax on the top 0.1% of income earners would affect roughly 20,000 Canadians.
Based on the figures provided by Worthwhile Canadian Initiative, I (roughly) estimate the amount of income required to be in the top 0.1% is $600,000 a year. A very rough estimate of the average income of earners in this group is $1,600,000 a year; the actual amount could be anywhere from $1,000,000 to $3,000,000 I figure.
Thus a marginal tax bracket that only applied to those 20,000 people would start at $600,000 and on average apply to $1,000,000 in income (the difference between $1,600,000 and $600,000). A person in Ontario already faces an over 40% marginal income tax rate on that income (A 29% federal rate plus a 11.16% provincial rate - source).
You could only raise this rate so far before serious issues with tax evasion and tax avoidance takes place. I do not believe you could get this rate much past 45% (total), but let's suppose for the sake of argument we could raise it to 50%. An additional 10 percentage points in income tax rates for incomes rising above $600,000 would generate an additional $2 billion in government revenue, if you assume that income levels would remain unchanged. (The $2 billion figure is calculated by 20,000 persons * ($1,600,000 - $600,000) * 10% )
However, behaviors would change greatly - through tax avoidance - high income Canadians could move to the United States, convert labour income into investment income, substitute labor for leisure or through outright tax evasion. At these high levels of income I would estimate even in the best case scenario 25% of this revenue would be lost, knocking this $2B in revenue down to $1.5B. My guess is that, in reality, the losses would be well over 50%.
In 2009 Canadian government revenue is expected to be around $237B (source), so $1.5B would represent a 0.6% rise in tax collections - and in my view the $1.5B is a best case scenario. The extra $1.5B would not go particularly far in increasing social programs or transfers to the poor. It seems hardly worth it given the large potential for unintended consequences and the fact that high taxes reduce economic growth (see: The Effect of Income Taxes on Economic Growth). There would seem to be much more effective ways of reducing inequality in our society.
Comments
You know, there are estimates of labor supply elasticities in the labor and taxation literature. You could use those instead of your “hunches” to come up with real estimates.
HI Mike:
I guess what do you mean by a “roughly estimation”, in econometric theory we use many different types if rough estimation, but the most usual is heterocedastic roughly estimations.
It is the way do you that term?
Good luck!