Analysis of ONDP proposed high income tax bracket
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This is an analysis of the Ontario NDP proposal to increase the top rate of tax by 2 percent for those with taxable
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income higher than $500K.
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This analysis is by Kevin Milligan, Associate Professor of Economics, UBC. http://faculty.arts.ubc.ca/kmilligan/
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kevin.milligan@ubc.ca
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April 3, 2012
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NDP Proposal: http://ontariondp.com/en/horwath-proposal-would-put-some-fairness-in-an-unfair-budget-plan-aims-to-restore-tax-fairness-and-help-households-hit-by-cuts
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Globe and Mail article:http://www.theglobeandmail.com/news/politics/ndp-conditions-on-ontario-budget-include-tax-hike-for-highest-earners/article2390643/
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Update from Michael Rosenstock from Ontario NDP: This increase is *before* the surtax. So, effectively it is a 3.12% increase,
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not 2.00%. This information was not in the press release or the Globe article. I'm happy to make the corrections that result.
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Here is what the press release says: "In order to offset costs those Ontarians making more than half a million
dollars would see a modest, two-percentage point income tax increase. "
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There is no public source of data that allows us to know exactly how much income is in an Ontario $500K tax bracket.
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Below, I provide my estimate, given the sources that are available and some assumptions. I make my assumptions clear.
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I am happy to hear about improvements to this estimation, or corrections if I should have made a mistake.
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Important note: I am sharing these preliminary calculations in order to better understand the NDP's proposal.
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These are preliminary calculations and so I cannot guarantee their accuracy until I have investigated further.
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The results are quite sensitive to how I estimate the share of taxable income over 500K. The distribution is thin up there; hard to estimate well.
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The CRA income statistics can tell us taxable income in certain income ranges.
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Update: Stephen Gordon found that the *final* (rather than interim) CRA statistics have provincial breakdowns. I will use this.
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http://www.cra-arc.gc.ca/gncy/stts/gb09/pst/fnl/html/t02aon-eng.html
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Note this is TOTAL income of those with 250K plus income, not just income above threshold.
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$41,505,197,000All-Canada total is $93,712,901,000
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Let's bring this forward to 2012. 2009 actually had lower taxable income than 2006. So, let's just assume 5% growth per year
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3-yr growth rate15.76%
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Projected 2012 taxable income for those with 250K+total income$48,047,453,677
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We need to break out income over 500K. All we have so far is income over 250K.
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I take the 2008 Survey of Labour and Income Dynamics. Using weights, I find that the total income
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in 500K+ and the total income 250K+. I can then calculate a ratio I use for the projection
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SLID total income of those with 250K+$84,763,778
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SLID total income of those with 500K+$38,666,250
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Ratio of over 500K to 250K45.62%
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So, we have an estimate of about $48B of Ontario income in 2012 over the 250K threshold.
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We also know that in the 2008 SLID, the ratio of incomes for those with 500K to those with 250K is about 46%.
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But this is *total* income. We need to know how much of this is over the 500K threshold.
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For this we need to draw on the Pareto parameter for Canadian incomes.
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For Canada, the alpha parameter is about 1.7.
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(See p. 45 of Atkinson Piketty Saez 2010) http://elsa.berkeley.edu/~saez/atkinson-piketty-saezJEL10.pdf
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Estimate of Ont taxable income of those with $500K$21,917,556,055Apply the 45.62% ratio from above
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Alpha:1.7
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How much is over the $500K threshold?$12,892,680,032
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Combined current Ontario top rate46.41%http://www.taxtips.ca/taxrates/on.htm
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Proposal: Extra 2 percentage points2.00%
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add in the surtax of 56%1.12%
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total increase in taxes3.12%
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New top rate49.53%
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If taxes go up, some high income earners will find ways to avoid the higher taxes by changing how they report
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their income. We call this a 'behavioural response to taxation'
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Evidence suggests that the 'elasticity' that governs this response is between 0.2 and 0.5 in general, but higher
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for high income earners.
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Here is a paper by Finance Canada that summarizes this research
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http://www.fin.gc.ca/taxexp-depfisc/2010/taxexp1003-eng.asp#tocpart2-17
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Here is some evidence on behavioural effects from the UK:
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http://economix.blogs.nytimes.com/2012/03/27/britains-experience-in-raising-the-top-tax-rate/
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http://www.ifs.org.uk/budgets/gb2012/12chap9.pdf
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Accounting for behavioural responses shouldn't be a left-right issue. The noted liberal economist
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Paul Krugman today cited Diamond and Saez's work on top incomes and borrowed their elasticity estimate of 0.25.
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http://krugman.blogs.nytimes.com/2012/04/03/the-simple-analytics-of-soaking-the-rich-wonkish/
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.
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Below, I show the revenue estimates with different assumptions for this elasticity, ranging from 0 (no response)
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to 0.7 (strong response)
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The first column shows the assumption for the elasticity.
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The second column shows the 'static' revenue estimate, assuming no behavioural response.
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the third column shows the assumed behavioural response.(See formula (5) on p. 8. http://elsa.berkeley.edu/~saez/saez-slemrod-giertzJEL12.pdf)
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The last column "2012 net revenue" shows how much revenue you should expect on net from this tax change.
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Revenue with different assumed taxable income elasticities2012 Revenue assuming no behavioural responseBehavioural response2012 net revenue
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0$402,251,617$0$402,251,617
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0.1$402,251,617$59,220,836$343,030,781
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0.2$402,251,617$118,441,671$283,809,946
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0.25$402,251,617$148,052,089$254,199,528**this is the elasticity assumed by Paul Krugman. http://krugman.blogs.nytimes.com/2012/04/03/the-simple-analytics-of-soaking-the-rich-wonkish/
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0.3$402,251,617$177,662,507$224,589,110
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0.4$402,251,617$236,883,343$165,368,274
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0.5$402,251,617$296,104,178$106,147,439
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0.6$402,251,617$355,325,014$46,926,603
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0.7$402,251,617$414,545,850-$12,294,233
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According to the Globe and Mail, the Ontario NDP assumes this tax would bring in $570 million in new revenue.
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Note: 5:24pm PDT: I just updated the behavioural response to account for the income distribution a la Saez.
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Note: 6:19pm PDT: updated after Michael Rosenstock of ONDP clarified that they are increasing by 3.12%, not 2%.
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Note: 10:18pm PDT: updated to change how I estimated share of taxable income over 500K
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Note: April 24th: All-Canada income for 250K+ earners is $93,712,901. So, Ontario is 44.3% of total. Rough guess for Canada-wide application would be to scale results by 1/0.443 = 2.26
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