Taxing high earners will backfire on Ottawa says Fraser Institute

Federal government will raise less by targeting the wealthy report calculates

Taxing high earners will backfire on Ottawa says Fraser Institute
Steve Randall

The federal government’s hopes of increasing revenue from high earners is flawed and will eventually result in lower revenue.

That’s the finding of a study by the Fraser Institute called Revenue Effects of Tax Rate Increases on High-income Earners. It says that the numbers do not account for taxpayer behaviour.

Considering the 2016 federal income tax hike from 29% to 33%, author Ergete Ferede says that if taxpayers continued to act as if there had not been an increase, there would have been an estimated $10 billion boost to the government’s revenue this year.

But taxpayers are not passive and when behavioural changes are included in the calculation, the revenue drops dramatically to just $800 million – a decrease of $9.2 billion!

“When governments raise tax rates with an eye on more revenue, taxpayers respond by working or investing less, or legally shifting income or expenses to reduce their taxes, which results in less additional revenue than governments expect,” said Finn Poschmann, resident scholar at the Fraser Institute.

It gets worse
The story for the feds gets worse with Ferede, associate professor of economics at MacEwan University in Edmonton, estimating that by 2025 the behavioural changes of taxpayers will result in less revenue being collected than if the tax rate was not changed.

“Tax rate hikes on high-income earners seem to be a popular policy choice for governments facing budget challenges, but this study casts doubt on the appropriateness of raising tax rates on high-income earners as a tool for gaining revenue,” Ferede said.