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) leads to a 6.64%
decrease in the top 1% income share.
How does this compare to literature?
Milligan and Smart (2014) use same data; find similar robust result.
Department of Finance (2010) finds e=0.62 with similar approach.
SSG (2012) conclude that 0.25 is middle of range of estimates for US.
Why different from SSG (2012)?
Existing evidence may be confounded by time series trends.
e is a function of particular tax base. CanadaUS
Using provincial variation, some income may leak horizontally to other
provinces, so parameter may be different federally/provincially.
Milligan and Smart: Provincial Taxation of High Incomes Page 12 of 22
A Counterfactual: Each province introduces top tax bracket
Consider the following exercise:
Take the tax system in 2011.
Institute a top tax bracket in every province at that provinces 1% threshold.
Rate for new bracket is +5% over the current top rate.
Milligan and Smart: Provincial Taxation of High Incomes Page 13 of 22
Table 2: Simulated Base and Counterfactual Tax Systems
Base System
+5 System
Bracket
Bracket
Threshold Rate
Threshold Rate
NL $ 63,807 13.3%
$ 168,904 18.3%
PE $ 98,145 18.4%
$ 139,722 23.4%
NS $ 150,000 21.0%
$ 154,588 26.0%
NB $ 120,796 14.3%
$ 147,010 19.3%
QC $ 78,120 24.0%
$ 169,649 29.0%
ON $ 78,361 17.4%
$ 215,316 22.4%
MB $ 67,000 17.4%
$ 161,098 22.4%
SK $ 116,911 15.0%
$ 180,240 20.0%
AB $ - 10.0%
$ 281,096 15.0%
BC $ 100,787 14.7%
$ 190,151 19.7%
Fed $ 128,800 29.0%
$ 128,800 29.0%
Fed-QC $ 128,800 24.2% $ 128,800 24.2%
Notes: shown are the bracket threshold for the base and +5 tax systems used in our simulations. The base
system is from 2011. The federal rate at the bottom of the table is different for Quebec because of the 16.5%
provincial abatement.
Milligan and Smart: Provincial Taxation of High Incomes Page 14 of 22
Measuring impact of +5 system on equity
How to measure equity?
Looking at 90-10 ratios for top 1% not useful.
Gini coefficient isnt going to pick up much for a change at top 1%
Our alterative:
Use the Average Tax Rate:
Change in ATR tells us the change in proportion of income individuals have
available to consume.
Milligan and Smart: Provincial Taxation of High Incomes Page 15 of 22
Figure 3: Average Provincial Tax Rates under Existing and Counterfactual
Tax Policies
Notes: Plotted are the average tax rates for Quebec, New Brunswick, and Alberta under the 2011 tax system and
under a new tax system featuring a high tax bracket with a rate 5 percent higher. The x-axis indicates the level of
earned income and the y-axis the average tax rate. The tax rates are calculated using the Canadian Tax and Credit
Simulator.
Milligan and Smart: Provincial Taxation of High Incomes Page 16 of 22
Results of +5 system on equity
Three ways to view results:
Has no impact for those up to top 1% threshold. Varies by province.
Impact for those over threshold rises slowly
At average income level for top 1%, only a 2.3% change in ATR. (Alberta)
Implication:
Top 1% share in AB has about doubled. Taking back 2.3% isnt much.
To undo changes in inequality would require much larger tax changes.
Milligan and Smart: Provincial Taxation of High Incomes Page 17 of 22
Measuring impact of +5% system on provincial revenue
Decompose into two conceptual chunks:
Net Revenue = Mechanical effect - Behavioural effect
Mechanical effect:
How much does revenue go up by applying new rates to existing taxable
income?
Assumes no behavioural response.
In +5% system, varies by province because of strong differences in
provincial income distributions.
Behavioural effect:
Using elasticity of 0.664, how much taxable income vanishes?
Varies by province because of size of existing top tax rate; differing income
distributions.
Milligan and Smart: Provincial Taxation of High Incomes Page 18 of 22
Figure 4: Per Tax Filer Mechanical Effect and Net Revenue
Notes: Plotted are the mechanical effect and net revenue per-tax filer of a new five percent tax bracket on incomes
over the top one percent threshold in each province.
Milligan and Smart: Provincial Taxation of High Incomes Page 19 of 22
Table 3: Explaining Differences in Revenue Across Provinces
PE AB
Average income of top 1% 203,948 648,475
Threshold to be in top 1% 139,722 281,096
Ratio (inverted Pareto) 1.46 2.31
Mechanical revenue per capita 32 184
Provincial revenue max'ing tax rate 22.8% 32.7%
Actual 2011 top tax rate 18.4% 10.0%
How much of mechanical effect remains 6% 71%
Two drivers of vast PEI-Alberta difference:
Income distribution in AB much more skewed. More income above 1%
threshold.
PEIs 2011 tax rate already near the revenue-maximizing level. Not AB.
Milligan and Smart: Provincial Taxation of High Incomes Page 20 of 22
Other impact: Federal tax revenues shrink
Because of co-occupied tax base, there is vertical fiscal externality:
If reported income goes down in response to provincial tax rate, federal
taxable income also affected.
Apply federal tax rates to tax base shrinkage to gauge size of vertical
externality.
Not accounted for here:
Other tax bases could be positively affected.
o Corporate revenues might go up.
o Other province revenues could go up.
Milligan and Smart: Provincial Taxation of High Incomes Page 21 of 22
Table 4: Assessing the Vertical Fiscal Externality
NL PE NS NB QC ON MB SK AB BC
Mechanical revenue 24 4 43 30 490 1288 64 64 506 370
Behavioural revenue -12 -3 -34 -17 -379 -651 -38 -32 -146 -162
Net provincial revenue 12 0 9 14 111 637 26 32 360 209
Change in federal
revenue -20 -4 -38 -25 -317 -842 -49 -46 -282 -238
Gains in other tax bases +? +? +? +? +? +? +? +? +? +?
Notes: Reported are results for each province of the simulated revenue impact of a new tax bracket starting at each provinces top one percent income threshold
with a tax rate 5 percent higher than the existing top rate. The simulations are based on 2011 data.
Change in federal revenue is potentially very large
Feds dont get any mechanical effect since they didnt raise rates.
Federal top tax rate is 29%, so loss of taxable income hurts feds more
Milligan and Smart: Provincial Taxation of High Incomes Page 22 of 22
Summary
Four main findings:
Provincial taxable income elasticity is high.
Equity: +5% system wouldnt do much to reverse top 1% income surge.
Revenue: Vast provincial differences in revenue potential of new top 1%
bracket.
Negative impact on federal revenues as large as provincial revenue gains.
In future work:
Try to sort out magnitudes of tax avoidance vs. horizontal shifting
Calculate optimal rates that fully account for all vertical and horizontal
externalities.