The Unexpected Impact of Ontario’s “Tax on the Rich”

Ontario's new "tax on the rich" will likely create more economic costs than benefits, according to a report released today by the C.D. Howe Institute. In "Ontario's Tax on the Rich: Grasping at Straw Men," Associate Director of Research Alexandre Laurin finds taxpayers' behavioural responses will reduce revenue over the long run by more than the province can expect to collect from the tax hike.

Confronted by a tax increase, taxpayers may respond in various ways, noted Laurin. Some would likely do nothing, but others may choose to substitute more leisure for overtime work, to migrate to a lower tax jurisdiction, to engage in more aggressive tax planning, or to modify forms and timing of compensation, use of tax deductions, and tax avoidance or evasion. "Many studies have shown that, on average, tax increases have a negative effect on economic activity and incomes, especially for high-income earners who tend to be more responsive to tax changes," said Laurin. Starting in July 2012, the provincial statutory tax rate for taxpayers earning more than $500,000 will be 2 percentage points higher than now, to which a 56 percent provincial surtax applies, translating into an effective total increase of 3.1 percentage points.

Research on short-run and longer-run tax base impacts of a change in the highest provincial statutory tax rates suggests high-income earners will likely reduce their taxable income by about 2 percent in the short term, and by more than 10 percent in the long run as taxpayers slowly adjust to the change. Based on this estimated reaction to the tax, Laurin projects net proceeds of about $450 million in 2013, falling thereafter to about $200 million by 2016 (in constant dollars), to nearly zero in 2019, and to a loss of about $200 million by 2027. What's more, the rationale behind the raise, which seems to have originated from the rhetoric of the "Occupy" movement, is that the "rich," the top 1 percent of earners, do not pay their fair share of personal income taxes. However, the 25,000 high-income earners and their families affected by the new tax already pay about one of every five income tax dollars - net of tax credits and benefits - in Ontario, notes Laurin. Overall, Ontario's personal income tax system already redistributes more income than most other provinces. The province's top 1 percent of earners shoulder more than one-quarter of all income taxes, while the bottom 75 percent shoulder about 12 percent. For the report go to: (Link)

C.D. Howe Institute——Bio and Archives The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.