Dalton McGuinty’s minority government in Ontario has agreed to the NDP’s new 2% tax on income over $500,000 to get the budget passed. However, according to Scott Stinson this “is effectively a tax increase of 3.12% because it will be imposed before a high-income surtax that already exists.” McGuinty expects this new tax to bring in an extra $470 million per year, and I’m reminded of the Laffer curve as a reason why this added revenue may not fully materialize.
It’s important to consider the possible secondary effects of any change. We tend to take for granted that increasing tax rates will produce more revenues, but the simple example of the Laffer curve shows that this isn’t always true. If the tax rate is 0%, tax revenues will be zero. But if the tax rate is 100%, tax revenues will also be zero because nobody would bother to work. So, somewhere between 0% and 100% tax rates, tax revenues stop increasing as the tax rate increases.
Getting back to the new tax increase, the obvious secondary effect is that some high-income Ontarians will leave the province. I have no idea how many will leave, but the number who stop paying taxes in Ontario due to this tax increase will not be zero.
Let’s focus on those whose income is $1 million per year. The new tax aims to collect an additional 3.12% of the amount over $500,000, or $15,600. If a million-dollar earner would have paid $400,000 in income taxes, then having just one of these people leave the province will wipe out the added revenue from $400,000/$15,600 = 26 others who choose to stay. So, the new tax will be revenue-neutral on this group if only about 4% of them choose to leave Ontario.
Trying to pile extra taxes on high earners is a tricky game, especially when they can easily choose to settle in a new province or even a new country.