!"#$%&' )*"+*,--./.

01 2&' 3,',*24
!25 )*,6,*,&7,- .& 82&2'29 %-:;20,-
6*"; ),*-"&24 <&7";, !25 =202

8rlan Murphy, SLausucs Canada
Mlke veall, McMasLer unlverslLy
Mlchael Wolfson, unlverslLy of Cuawa
)*,#2*,' 6"* 0>, <?))$8@A?B 7"&6,*,&7,
<&,CD24.01 .& 82&2'29 =*./.&+ 3"*7,-E FD07";,- 2&' )"4.71
FG2H2E 3,I*D2*1 JK$JLE JMNK

All oplnlons expressed are Lhose of Lhe auLhors (oral presenLauon: veall).
1hanks Lo !ullen ulcalre, Pung ham, Mohammad Mashlur 8ahman and ?ue
xlng for excellenL research asslsLance and SSP8C for nanclal supporL.
1
Starting Point :
Much of Lhe lncrease ln lncome lnequallLy ln
Lhe lasL years ls due Lo a surge ln Lhe lncome
share of Lhe Lop 1, Lop 0.1 and Lop 0.01

2
0
2
4
6
8
10
12
14
16
18
20
1
9
2
0

1
9
2
3

1
9
3
0

1
9
3
3

1
9
4
0

1
9
4
3

1
9
3
0

1
9
3
3

1
9
6
0

1
9
6
3

1
9
7
0

1
9
7
3

1
9
8
0

1
9
8
3

1
9
9
0

1
9
9
3

2
0
0
0

2
0
0
3

2
0
1
0

<&7";, @>2*, "6 0>, !"# NOE 82&2'2E NPJM$JMNM
1he surge
3
Motivation (1) :

1. Pow whaL Lhe uepL. of llnance calls Lax
expendlLures" (Lax credlLs, deducuons,
preferences) beneL Lop 1, Lop 0.1, Lop
0.01
2. u.S.: Pang, nunn, 1oder and Wllllams
(2012) and 8rown, Cale and Looney (2012)

4
Motivation (2) :
3. Chrls 8agan, !"#$% '() *'+" #("+(%, leb. 11, 2014-
. 1he Canadlan lncome Lax sysLem ls repleLe wlLh
bllllons of dollars of 'Lax expendlLures' .Whlle some
of Lhese are senslble, many oLhers needlessly
compllcaLe Lhe lncome Lax sysLem and lncrease Lhe
growlng percepuon of unfalrness. l challenge Lhe
governmenL Lo commlL Lo ellmlnaung $2-bllllon Lo
$3-bllllon of Lax expendlLures each year for Lhe nexL
Lhree years. Cnce achleved, Lhe sLage would be seL
for a small overall reducuon ln Lax raLes."
3
Motivation (3) :
ln conslderlng a Lax expendlLure, overall/Lop-end
progresslvlLy ls one of Lhe facLors LhaL mauers as
well as
AdmlnlsLrauve ease
Lconomlc emclency: overall, purpose of
measure, gov'L revenue
8elaLed work: ueparLmenL of llnance (2011):
Clnl j wlLh Lax credlLs and ^ wlLh deducuons
does noL look aL lndlvldual Lax preferences
6
What we do :
Slmple and rough, 2011
use LonglLudlnal AdmlnlsLrauve uaLabase (3 mllllon
records, aggregaLes): Canada 8evenue Agency
publlshed daLa used as a check
AllocaLe beneL of Lax expendlLures (from uepL. of
llnance 2012 for 2011) across lncome caLegorles
lncome = all lndlvldual ler currenL lncome, lncludlng k
galns, gov'L Lransfers
MeLhod: ad[usL usage by declle (and Lop 1, 0.1,
0.01) for:
nonrefundablllLy (credlLs)
ulerenL Lax raLes, lncludlng zero (deducuons)
7
Caveats :
no behavlour
1ax raLe calculaLed aL average for declle (and
Lop 1, 0.1, 0.01)
no behavlour
1ax raLe ls marglnal rsL $" raLe
B" I,>2/."D*
. $/0
8
LsumaLed share of selecLed lncome
caLegorles
0 10 20 30 40 30 60 70
CovernmenL Lransfers
ayroll Laxes pald
Wage and salary lncome
lnvesLmenL and lnLeresL
neL federal lncome Lax payable
CLher lncome
8enLal lncome
Self-employmenL lncome
neL ulvldend lncome
rofesslonal lncome
neL caplLal galns
1oLal lncome (lncl. caplLal
<&7";, @>2*,-
1op 1
1op 0.1
1op 0.01
9
LsumaLed Allocauon of 8eneLs
10
0 20 40 60 80
88S (deducuon for conLrlbuuons)
non-caplLal loss carry-overs
CaplLal loss carry-overs
ulvldend gross-up and credlL
Allowable buslness lnvesLmenL losses
arual lncluslon of caplLal galns
lnvesLmenL Lax credlLs
ueducuon of carrylng charges
neL federal lncome Lax payable
1oLal lncome Share
<0,;- ?,420,' 0" 82#.024 <&7";,
1op 1
1op 0.1
1op 0.01
LsumaLed Allocauon of 8eneLs
11
0 20 40 60 80 100 120
Allmony and malnLenance paymenLs
Lmployee sLock opuon deducuon
ueducuon of home relocauon loans
CLher employmenL expenses
ollucal ConLrlbuuon 1ax CredlL
CharlLable uonauons 1ax CredlL
neL federal lncome Lax payable
1oLal lncome Share
A2*+,41 B"0 ?,420,' 0" 82#.024 <&7";,
1op 1
1op 0.1
1op 0.01

LsumaLed 8eneLs golng Lo Lhe 1op
1
12
0 300 1,000 1,300 2,000 2,300 3,000
Allowable buslness lnvesLmenL losses
lnvesLmenL Lax credlLs
non-caplLal loss carry-overs
CaplLal loss carry-overs
ueducuon of carrylng charges
88S deducuon
ulvldend gross-up and credlL
arual lncluslon of caplLal galns
CAl1AL 8LLA1Lu
!"# NO !25 Q,&,R0 ST.44."&-U

LsumaLed 8eneLs golng Lo Lhe 1op
1
13
0 300 1,000 1,300 2,000 2,300 3,000
ueducuon of home relocauon loans
ollucal ConLrlbuuon 1ax CredlL
Allmony and malnLenance paymenLs
Lmployee sLock opuon deducuon
CLher employmenL expenses
CharlLable uonauons 1ax CredlL
LA8CLL? nC1 8LLA1Lu 1C CAl1AL
!"# NO !25 Q,&,R0 ST.44."&-U
Other :
Labour Sponsored venLure CaplLal
Corporauons CredlL (now dlsconunued)
1ax-lree Savlngs AccounLs
nelLher beneL Lop-end as much as 88Ss

14
Tax measures we couldnt do :
Carry-forward of Lducauon, 1exLbook and 1uluon 1ax
CredlLs (2011 Lax expendlLure of $333m)
non-Laxauon of veLerans' dlsablllLy penslons and
supporL for dependenLs ($140m)
arual ueducuon of Meals and Lxpenses ($180m)
8eglsLered Lducauon Savlngs lans ($183m)
Llfeume CaplLal Calns Lxempuon for larmlng, llshlng
roperues ($330 mllllon), for Small 8uslness ($360m)
llow-Lhrough share deducuons ($280m)
Mlneral Lxplorauon 1ax CredlL ($123m)
13
Conclusions (1) :
1houghL experlmenL: suppose one were looklng Lo
chop federal personal lncome Lax expendlLures whose
removal would
lmprove Lop-end progresslvlLy
Could be done wlLh a sLroke of Lhe pen" l.e. no
new reporung requlremenLs such as lmpllclL renL
on owner-occupled houslng, or (arguably)
employee beneLs
noL aecL caplLal lncome
noL many (locuses Lhe debaLe? 8ole of LrusLs, CCCs?)

16
Conclusions (2) :
ln pracuce, almosL all of Lhe Lax preferences ln
Lhe Canadlan personal lncome Lax sysLem LhaL
do noL lnvolve caplLal lncome or sLock opuons
lncrease raLher Lhan reduce progresslvlLy aL
Lhe very Lop end
17


Thank you !
18