Quebec taxpayers, and in particular high-income taxpayers, bear the heaviest fiscal burden in North America. Quebec’s top marginal tax rate is higher than in any other province, and this rate hits the taxpayer at the relatively low income level of $53,405, the lowest level in Canada (except for Alberta, which has a flat rate). In fact, the top marginal rate is reached faster in Quebec than in any of the G-7 countries. Applying to Quebec the tax structure of Ontario, Quebecers would pay $5-billion less in income taxes.
Those who justify this tax rate claim Quebec residents are more “progressive” than other North Americans and want the government to redistribute wealth to those in need. One can agree or not with this interventionist and egalitarian goal, but the truth is that the high tax policies pursued by successive Quebec government do not even deliver the expected results. Despite having the highest and steepest marginal rates, high-income Quebecers contribute less to total income tax receipts than do their counterparts in Ontario. Conversely, the burden supported by middle-class taxpayers is greater. What explains this paradox?
This situation illustrates how excessively high taxes end up killing the goose that lays the golden eggs. Instead of encouraging people to get rich, Quebec fiscal policies tend to subsidize the poor and discourage the accumulation of wealth. As a result, Quebec has a lot more poor people and a lot fewer rich people than Ontario or Alberta.
Forty per cent of “taxpayers” don’t actually pay any taxes because they’re too poor to do so. The equivalent number in Ontario is 29%. This isn’t a figure to be proud of, even from a “progressive” point of view. At the other extreme of the revenue scale, only 2% of Quebec taxpayers, compared to 3.7% of those in Ontario and 2.9% of Canadians as a whole, earn incomes of $100,000 or more. Looked at another way, Quebecers who earn $50,000 or more make up 14% of all taxpayers; in Ontario, you have to set the bar at $60,000 to get the same proportion.
It is then no surprise that rich Quebecers pay a far smaller portion of all tax income than do rich Ontarians. The 2% of taxpayers earning $100,000 or more receive 13% of total income and their contribution to the total provincial income tax receipts is 22%. In Ontario, these taxpayers receive 23% of total income and contribute proportionately twice as much (44%).
The upshot: A greater share of the Quebec income tax burden is borne by those who are not necessarily very rich. Taxpayers with revenues between $50,000 and $100,000 earn 28% of total income and contribute 37.5% of total provincial income tax. In Ontario, taxpayers in this income group contribute to the tax revenues in almost the same proportion as their share of total income (about 31%).
Many Quebecers think of their society as more enlightened and egalitarian than their neighbours. But the reality is that very “progressive” tax rates end up creating a rather “regressive” situation. High marginal tax rates kill incentives and discourage wealth accumulation. The solution is not to tax the rich even more but to encourage wealth creation by lowering the tax burden, and then to tax more high-income earners.
As is well documented, the taxable income of high-income individuals is very sensitive to tax rates, so sensitive that government revenues from that group might increase following a reduction of tax rates or decrease following a tax hike. A recent study by a team of University of Montreal and Bank of Canada researchers shows that a significant part of the taxpayer response to increases in tax rates takes the form of taxpayers moving down the income ladder. When confronted with higher tax rates, people respond by reducing their work effort, changing the nature of their compensation package (replacing wages with fringe benefits), seeking more tax shelters and even engaging in tax evasion.
For this reason, cuts in personal income tax rates of high-income earners greatly benefit government revenues. Such cuts tend to generate economic growth and to be self-financing. Economic theory and historical evidence in the U. S. and Ontario show that this is indeed the case. Following the Kennedy and Reagan tax cuts, economic growth accelerated and personal income tax revenues increased. The same happened in Ontario following the Harris government 30% tax cuts in the mid-90s. Under president Ronald Reagan, tax payments and the share of the tax burden borne by the top 1% climbed sharply. In 1981, the top 1% of income earners paid 17.6% of all personal income taxes; by 1988 their share had jumped to 27.5%. During that period, the top marginal rate dropped to 28% from 70%.
The Quebec Liberal party was elected last year on the promise to reduce personal income taxes by $1-billion a year over the next five years, starting with this year’s budget. Quebec Finance Minister Yves Seguin has been sending signals that he might lower taxes for middle-income families but that the rich would continue to bear the same burden, or even see their tax rates increase. GDP per capita in Quebec is 18% lower than that in Ontario and lower than the Canadian average. There won’t be more wealth to redistribute five years from now if the government goes ahead with these inefficient soak-the-rich policies.
Norma Kozhaya is an economist with the MEI and the author of the Research Paper entitled Les bienfaits économiques d’une réduction de l’impôt sur le revenu.