Ontario’s tax-the-rich scheme could backfire and end up costing combined provincial-federal coffers $50 million by 2015, a new study says.

The report by the C. D. Howe Institute is the first to attach a dollar figure to the controversial new tax, which critics warn will fail because so many high-income earners will find ways to avoid paying it.

“The new tax on high-income earners will likely create more economic costs than benefits,” says the report called Ontario’s Tax on the Rich: Grasping at Straw Men. It cites reduced economic activity and an already unfair burden on the province’s wealthiest.

But supporters of the measure, which comes into effect in July, say the additional 2 per cent tax on incomes over $500,000 helps address the widening income gap between the richest income earners and everyone else.

Income inequality, a growing area of policy concern in developed countries, was popularized by the Occupy protest movement, which last summer targeted financial districts, such as Bay St.

“I think at this particular moment in time, when the gap between rich and poor has become so enormous, and everything from hospitals to education are being cut back, it’s not unreasonable to ask high income people to pay a little bit more,” said Jim Stanford, chief economist with the Canadian Auto Workers union.

The new tax was introduced by the minority provincial Liberals in a bid to win the New Democratic Party’s support for its 2012 budget earlier this year.

An estimated 25,000 Ontario residents, or about 0.4 per cent of the population, will have to pay it. On an income of $600,000, it adds $3,120 to the earner’s tax bill.

The government estimates it will reap an extra $470 million in tax revenues, which it plans to use to pay down its $15.2 billion deficit.

But the C. D. Howe study says the province won’t collect anywhere near that amount and the federal government stands to lose out altogether as the rich find creative ways to reduce their reported income.

Even if just 5 per cent of top income earners change their behaviour, it could “poke a big hole” in the government’s revenue projections, the report’s author Alexandre Laurin said.

“A 5 per cent reduction for someone earning $1 million is only $50,000. It doesn’t take much to get there. If you take one less board appointment, or one more week’s vacation,” Laurin said in a telephone interview.

Other ways to reduce reported income include moving some earnings offshore, or to other provinces, or putting some income into trusts and holding companies, the report said.

Laurin estimates provincial revenues from the new tax will be as little as $200 million a year by 2016 and eventually fall to zero.

For the federal government, the impact is worse as any reduction in reported income means lower federal tax revenues. He estimates the new measure will cost $50 million in lost federal-provincial revenues by 2015.

Ontario’s richest, who earn 12 per cent of the province’s income, already pay 27 per cent, a disproportionate share, of Ontario’s income taxes, the report adds.

Labour economists and left-wing think tanks were quick to dismiss the institute’s views.

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“I think it’s Conservative propaganda,” said Kathleen Monk, executive director of the Broadbent Institute.

However, even progressive economists admit anyone who wants to avoid paying Ontario’s higher income tax rate has probably already shifted their business or residential address to western Canada.

The highest provincial tax rate in Alberta is just 10 per cent, compared to nearly 19 per cent in Ontario, including two previous surtaxes plus the new 2 per cent tax.