Economic Issues 2D03
Tax System and Tax Policy: Taxation of High Incomes (A5)
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- Background:
In this section, draw on Statistics Canada’s public tables to cover the following:
Who are the top 1%?
- Top income cut-off, average income, share of income from labour & how much tax they pay
- Sex and age
- Province/Location
Compared to the bottom 50th percentile of tax filers, how has the income share and effective tax rate of the top 1% evolved over the data period?
By province, how has the income share and effective tax rate of the province-specific top 1% evolved over time?
- Policy evaluation.
Consider the following proposal to increase the top marginal tax rate on the top (province-specific) 1%:
| Base Tax System, 2020 | Fictitious System, +5 | |||
| Top MTR threshold ($) | MTR (%) | Top 1% MTR threshold ($) | MTR (%) | |
| NFLD | 189,604 | 18.3 | 210,200 | 23.3 |
| PEI | 63,969 | 16.7 | 172,400 | 21.7 |
| NS | 150,000 | 21 | 191,900 | 26 |
| NB | 160,776 | 20.3 | 175,000 | 25.3 |
| ON | 220,000 | 13.16 | 260,600 | 18.16 |
| MB | 72,164 | 17.4 | 202,600 | 22.4 |
| SK | 129,214 | 14.5 | 209,800 | 19.5 |
| AB | 314,928 | 15 | 297,900 | 20 |
| BC | 157,747 | 16.8 | 244,800 | 21.8 |
| Federal | 214,368 | 33 | 244,800 | 33 |
Cover the following issues (by province) with this proposal (Assume a constant ETI of 0.664):
- What is the net revenue effect (by province) of this proposal? Comment on any noticeable provincial differences.
- How much of the mechanical revenue gain disappears because of a behavioural effect?
- What are the revenue and mechanical effects per tax filer?
- Why is the elasticity of taxable income important?
- What might explain these differences
- Think about skewness & revenue gain share of the mechanical effect
- What is the marginal cost of public funds?
- Explain and calculate the optimal province-specific top 1% marginal tax rate. How far off is it from the fictitious +5 marginal tax rate?
- Assuming no income shifting, what is the size of the vertical fiscal externality?
- What are the progressivity implications of this proposal?
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