10/28/2015 09:33 EDT | Updated 10/28/2015 09:59 EDT

Trudeau's Tax Hike On The Rich Should Be Much Larger Than Planned: CCPA

  • Canada’s rich now paying lower income taxes than America’s rich
  • Taxes on rich were much higher during boom years of the past
  • ‘Scant evidence’ that wealthy will leave Canada over higher taxes

Incoming prime minister Justin Trudeau’s plan to raise income taxes on the country’s most affluent earners isn’t ambitious enough, and the new government should hike income taxes on Canada’s one-percenters to 65 per cent, says a new study.

The report from the left-leaning Canadian Centre for Policy Alternatives (CCPA) says Canada could provide free post-secondary education and cover the costs of infrastructure projects with the money raised. And it disputes the notion that Canada’s rich would flee the country to avoid the new tax rate.

Trudeau ran on a campaign promise to lower taxes slightly for middle earners and create a new tax bracket for Canada’s highest earners, which would raise their top federal tax rate to 33 per cent from 29 per cent at present. It would apply to earnings above $200,000, which is roughly what you need to make to be in Canada’s top one per cent.

But the CCPA is urging the incoming Liberal government to just about double that tax rate, arguing the 65-per-cent rate would bring in an additional $15.8 billion to $19.3 billion in revenue annually, a 12- to 14-per-cent increase in the government’s tax haul.

That contradicts the Harper government’s long-standing argument that hiking taxes on the rich is pointless, because it wouldn’t raise enough revenue to be worth it.

The tax hike would cost the average one-percenter an extra $27,700 in taxes, on an average income of $289,000, the CCPA estimates.

But it could more than cover the $8.1 billion in tuitions paid annually to universities and colleges, as well as the $5 billion in federal support for provincial and municipal infrastructure projects, the CCPA says.

Or alternately, it would more than cover the $10 billion in deficit spending the Trudeau government is planning as an economic stimulus

“The top marginal income tax rate has been well over 50 per cent for most of the time Canada has had an income tax,” study author Lars Osberg said in a statement.

“In fact, during Canada’s high growth years between 1940 and 1980, the top marginal income tax rate was well over 70 per cent. … Our federal government used to ask more of Canada’s richest one per cent. There are plenty of reasons to do so again.”

The report argues Canada’s rich have it even better today, tax-wise, than their American neighbours.

Canada “has become a low-tax jurisdiction for the affluent compared to the U.S.,” the report says. It found that the average top marginal tax rate in the U.S., when combining federal and state taxes, is 47.9 per cent. In Canada, the average combined federal and provincial rate is 45.7 per cent.

The CCPA says a 65-per-cent top tax rate is the “revenue-maximizing” level of taxation. Any lower, and the government forgoes revenue; any higher, and people start hiding their income.

But that’s hardly a consensus view. The “optimal” rate of taxation is a hotly debated topic in economics, with some left-wing economists arguing it’s very high (above 70 per cent) while many right-wing economists argue it’s much lower.

And some economists argue that the best tax rate to maximize revenue is not the same as the best tax rate to grow the economy. They say taxes need to be as low as 15 to 20 per cent to maximize economic growth.

The CCPA report also takes a pre-emptive swipe at arguments that a 65-per-cent tax rate would cause the rich to leave Canada for lower-tax jurisdictions.

There is “scant evidence that higher top tax rates prompt a rush by ‘job creators’ or ‘the best and brightest’ to emigrate,” the report says.

It points to the example of New York City, where state and municipal taxes are higher than in the surrounding suburbs in other states. New York City even levies an unusual municipal income tax, but still loses relatively few taxpayers to the suburbs.

“It would only take a short move to escape increases in state top marginal tax rates,” the report says, “but very few people in fact move to another jurisdiction in response to tax increases.”

But the report notes that the chances of an “abrupt” shift to a 65-per-cent tax rate are “near zero.” Any shift towards higher taxes would likely be incremental, the CCPA argued.