To start this article, let’s review some tax facts. Top income earners in Canada have a marginal tax rate of around 50% when paying federal and provincial taxes. In my province of Alberta, a high income earner pays a 48% marginal rate after he earns $303,000 annually. Other provinces have a higher marginal tax rate with lower thresholds.
Is it this a wise or moral economic policy?
To deal with the “wise” aspect, logic says that higher taxes will discourage high-income earners from participating fully in the economy. To counter this, let’s bring up the example of a current hockey player who just signed a $1,000,000 contract with the Calgary Flames. He will play 84 games, which means he gets a gross pay of $11,900 a game. He hits the high marginal tax rate at about 26 games. At that point, his net pay is now $6,200 a game. If he is discouraged by high taxes, he should stop playing hockey right there. But he continues on through the entire hockey season, quite content that he is still making more money in one night than most of us see in a month. The 48% marginal tax rate is not affecting his participation in the economy.
Back in the 1980s, Sweden had a doctor shortage. When the government dug a little deeper for this social change, it found quite a few doctors working only half days. The doctors were discouraged because a full day of work put them into 80% tax rate which meant the second half of the day they were almost working for free. Instead the doctors were renovating their houses, fixing their cars, and learning to cook gourmet meals. The government reduced the marginal tax rate to 60%. The doctors came back to work fulltime—and hired carpenters and mechanics and ate in fancy restaurants.
So somewhere between 50% and 80% marginal tax rates is a point where high income earners start dropping out of the economy. There is no evidence that a 50% marginal tax rate is hurting the Canadian economy.
So what about the “moral” aspect? It sounds only fair that if a working poor person is only paying 10%, so too should a high-income earner. But the two demographics differ. The working poor are stuck in crappy jobs. There is little advancement or leverage to generate more wealth. On the other side, the high-income earner gained the opportunity to develop some valuable workplace skills from a strong family background and a high quality education. It also comes from a social system that allows a strong family background to flourish and delivers a high quality education. In other words, the attributes that gave a high-income earner the opportunity to create and enjoy wealth come mostly from society, not from some kind of John-Wayne-can-do-anything-by-himself attitude. If there is a moral aspect to high marginal tax rates, high-income earners need to be taxed more because they have taken more advantages from the system.
And here’s another moral angle. High marginal tax rates have been around for a long time. Citizens preparing their lives for a high income should know that they will be taxed at a higher marginal rate. They should see business deal between them and their society with eyes wide open. They chose to participate at level that puts them in the 50% tax rate. Why should the deal be broken because they don’t like paying taxes?
There are good economics and moral grounds for high marginal tax rates.