Is Increasing Income Tax Rates for HNW Effective?

Beth Graddon

With Canada’s competitiveness in question, and many wondering if our complex tax system puts us at a global economic disadvantage, a new report from the Fraser Institute answers an important question. Does increasing income tax rates for high net worth taxpayers help or hinder Canada’s fiscal outlook?

The June 25 Fraser Institute report specifically examines the impact of the 2016 increase for the top federal personal income tax bracket that raised the rate from 29% to 33%. The report aims to provide clarity on taxpayers’ behavioural responses to tax increases, and whether the government brings in more revenue through a rate increase.

Researchers found that increasing income tax rates for high net worth individuals is unlikely to have the outcome the government is hoping for, and it’s largely due to the behavioural response that occurs when taxpayers are facing a tax increase. Rather than simply paying more tax, people focus on tax-efficient strategies to reduce their tax burden in above-board ways relating to their investment choices, income splitting strategies, or simply by working less.

This means that the government won’t take in the revenue increase they aim to, and although it’s a common strategy to increase the taxes paid by Canada’s wealthy, it’s rarely an effective one. The Fraser Institute estimates that the increase has the potential to collect an additional $10 billion this year if taxpayers continued to behave as though there were no increase. But, with their behavioural response, that number is reduced to a mere $800 million increase for 2019, and that revenue stream will be short-lived. By 2025, taxpayers’ responses will outweigh additional revenue collected by the federal government – in fact, they may take in less.

There are two important take-aways resulting from this new report’s data.

1. Placing emphasis on tax-efficiency is an important financial planning strategy that taxpayers of all income levels can benefit from to reduce their tax burden.

2. Tax reform in Canada should be a government priority, over their current objectives focusing on tax enforcement to reduce the nation’s competitive disadvantage.

Additional educational resources: Become a DFA-Tax Services Specialist™ and help Canadians focus on generating and keeping income with tax-efficient strategies.