How high should top tax rates go?

November 1, 2019

U.S. Congresswoman Alexandria Ocasio-Cortez provoked a lot of hostile—and positive—reaction earlier this year when she proposed the United States should introduce a top tax rate of 70% on incomes over $10 million, with revenues going to pay for a Green New Deal. Although many on the right belittled her idea, it was in fact firmly based on the historical record.

Both the U.S. and Canada had marginal tax rates of over 90% on top incomes during the 1950s, and Canada’s rate was over 60% throughout the high-growth years of 1940–80, when the average real wage of all Canadian workers grew strongly. The wage stagnation of the last 35 years has been accompanied by lower tax rates at the top, but for most of the 100-odd years income taxes have existed, high top marginal tax rates have been the norm.

Still, some pundits argue that high tax rates will make Canada “uncompetitive” and perhaps result in high earners leaving Canada or working less or taking more steps to avoid paying taxes or “the global talent pool” steering clear of the country. There is little evidence to justify these concerns. It’s one thing to bluster about leaving the country if income taxes go up, but that would also mean giving up the public services those taxes pay for and the opportunities to make money that a high quality public infrastructure enables.

And even if some of the affluent become more likely to want to avoid and evade their taxes, it is a public policy choice whether the rest of us let them—enforcement of tax laws and closing tax loopholes is a better option. The reality is Canada’s higher income earners are not paying their fair share and there is lots of room to increase top tax rates.

So, how high can we go? Revenue maximizing tax rates for top incomes are now estimated to be at least 60% for Canada and up to 80% in the United States. In his 2015 CCPA report, How Much Income Tax Can Canada’s Top 1% Pay?, Lars Osberg proposed that the federal government should increase its top rate (on income above $210,000) to 65%, which would increase revenues for the federal government by an estimated $21.8 to 26.1 billion.

The Trudeau government did, as the Liberals promised in the 2015 election, increase the top tax rate, but by a much smaller four percentage points—from 29% to 33%—starting in 2016. The government estimated this would add $3 billion to annual revenues. In response, some of Canada’s wealthier income earners shifted their declared income, and particularly discretionary forms of income such as dividends, to 2015, to take advantage of the 29% rate that was disappearing in 2016. This was reflected as a higher total declared income for this group in the 2015 tax year and a big drop in 2016. Opponents of the tax increase immediately claimed this was proof the tax hike was a failure.

But figures recently released for the 2017 tax year show that the incomes declared by the top 1% have rebounded again, as have the federal taxes they paid, similar to what was expected. Once the initial income timing response was over, the hike in the top marginal tax rate has been effective in raising revenues.

Importantly, the policy success means the federal government could probably increase the top income tax rate again, and by considerably more. The move would be appealing if only for its capacity to lower levels of inequality in Canada—by enhancing and expanding social services or redistributing some of this money to lower incomes.

In his new book, Ideology and Capital, French economist Thomas Piketty proposes a top tax rate of 90% on the incomes and wealth of the world’s richest people. We’re not there yet, but popular support for wealth taxes is growing. There’s no reason why we shouldn’t take more steps along the path to greater fairness in taxation. 

Toby Sanger is Executive Director of Canadians for Tax Fairness. Lars Osberg is currently McCulloch Professor of Economics at Dalhousie University and the recent author of The Age of Increasing Inequality (Lorimer).