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With five months to go before the vote, the talk is all about taxes now. Earlier this month, the Liberals released their middle-income tax package, which they intend to promote as a better alternative to the Conservatives’ ‘family tax cut’ package.

The Liberal plan includes a cut in the middle tax rate of 1.5 percentage points, which would cost $3 billion. To pay for this, Justin Trudeau proposes a new 33 per cent federal tax rate for taxable incomes above $200,000, up from 29 per cent. (In fact, the increase in average tax for someone earning over $200,000 would be only 2.2 per cent, taking into account the reduction of 1.5 percentage points in the second tax rate.)

The proposed increase in the top rate would raise the combined federal and provincial top tax to about 53 per cent in Ontario and Quebec, 58 per cent in New Brunswick. That, according to some, would be enough to trigger an exodus of high-income Canadians — turning Westmount, Lawrence Park North and Shaughnessy Heights into wastelands of empty mansions with For Sale signs swinging in the breeze.

According to the Conservatives and other critics, the additional funds the Liberals are betting on from the introduction of a high-income tax rate won’t materialize because, as one pundit wrote in the Globe and Mail, “the tax base shrinks as taxes go up because high earners resort more to tax avoidance — by changing their residency, sheltering income, getting paid in stock options or hiring even better accountants.”

So we’re being told this “whopping big” increase of four percentage points in the top federal rate (2.2 per cent increase in the average rate) is going to mean boom times for moving companies and accountants — and that as a result, the Liberal fiscal plan has a revenue gap. NDP Leader Tom Mulcair, who has already stated he won’t raise income taxes, has declared that a top rate of 50 per cent would represent “confiscation”. (He’s still prepared to raise corporate taxes on the assumption that capital suddenly isn’t as mobile as people.)

So did Trudeau and company screw up? Does their tax plan amount to an attempt to “confiscate” funds they can never get at anyway, because the wealthy households in question will just pack up and leave? Short answers: No and no. As usual, the truth lies not in the policy alone, but in how it would be implemented.

The wealthy don’t get to be wealthy by ignoring tax-avoidance opportunities; most people earning north of $200,000 have already maxed out those opportunities. Even the best accountants can only do so much. The wealthy don’t get to be wealthy by ignoring tax-avoidance opportunities; most people earning north of $200,000 have already maxed out those opportunities. Even the best accountants can only do so much.

It’s reasonable to argue that, if taxes are increased on high-income, mobile earners, those people might consider moving to a lower-income tax district. But the size of the tax increase they face, and the level of income on which it applies, would be critical to that decision — as would a host of other socio-economic variables that have nothing much to do with taxes. Canada has taxed wealthy households at rates as high as 70 per cent in the past; no one is suggesting a return to anything like that.

The Liberals are proposing a 2.2-point increase in the average tax rate (four points in the top marginal rate) for anyone earning above $200,000. So if you earned $250,000, under the Liberal proposal you would pay an additional $1,350, roughly; if you earned $300,000, your additional tax would be $3,300; at $500,000 of income the additional tax would be $11,300. A millionaire would pay an additional tax of $31,300.

Compared with income, these are marginal tax increases. The households in question wouldn’t feel the sting at all. But let’s say these high-income earners want to leave anyway — to make a point. Where would they go?

No doubt some might consider New York City. There, the combined top federal, state and city tax would be tax 46.6 per cent for someone earning $209,000 and 50.7 per cent for someone earning more than $411,000. Ouch.

How about California? For someone earning $200,000 there, the combined federal and state top rate is 42.3 per cent; for someone earning $311,000 the combined federal and state top rate is 44.3 per cent; and for someone earning $411,000 the combined federal and state rate is 50.9 per cent.

Quite a few U.S. states have no state taxes; there the top marginal rate for someone earning more than $411,000 is 39.6 per cent. Take Texas, for example: There may be wealthy Canadians willing to pack up their families and move to Dallas because of the 13-point difference in the top rate.

But it’s not that simple — not for the rich, not for anyone. All households have to make a calculation based on a wide range of factors before making an economic move from one tax jurisdiction to another. Here’s one of those factors: New York and California taxes, as well as the taxes of every other state, do not reserve much in the way of revenues to fund public health and education. Those costs are left largely to the individual. As a result, the health and education infrastructure in the U.S. has being deteriorating for years. The wealthier you are, of course, the less such considerations affect you — but does anyone willingly move to a jurisdiction where public services are underfunded and falling to pieces?

As for the argument that a high-income tax bump would lead to more tax avoidance — yes, that’s going to happen. But not as much as you might think. The wealthy don’t get to be wealthy by ignoring tax-avoidance opportunities; most people earning north of $200,000 have already maxed out those opportunities. Even the best accountants can only do so much. It’s very likely that most high-income Canadians are not currently paying an effective federal top tax rate close to 29 per cent, or a combined top rate even close to 50 per cent.

There may be other good reasons for regarding a tax hike on wealthy households as a bad idea. But the notion of some mass exodus of high-earning households just isn’t plausible.

Scott Clark is president of C.S. Clark Consulting. Together with Peter DeVries he writes the public policy blog 3DPolicy. Prior to that he held a number of senior positions in the Canadian government dealing with both domestic and international policy issues, including deputy minister of finance and senior adviser to the prime minister. He has an honours BA in economics and mathematics from Queen’s University and a PhD in economics from the University of California at Berkeley.

Peter DeVries is a consultant in fiscal policy and public management issues, primarily on an international basis. From 1984 to 2005, he held a number of senior positions in the Department of Finance, including director of the Fiscal Policy Division, responsible for overall preparation of the federal budget. Mr. DeVries holds an MA in economics from McMaster University.

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