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Taxation and Top Incomes in Canada

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  • Kevin Milligan
  • Michael Smart

Abstract

We estimate the elasticity of reported income with respect to tax rates for high earners using subnational variation across Canadian provinces. We argue this allows for better identification of tax elasticities than the existing literature. We find that elasticities of reported income at the provincial level are large for incomes in the top one percent, but small for lower earners. There are strong indications that the response happens both through earned and capital income. While our estimated elasticities are large, changes in tax rates cannot explain much of the overall long-run trend of higher income concentration in Canada.

Suggested Citation

  • Kevin Milligan & Michael Smart, 2014. "Taxation and Top Incomes in Canada," NBER Working Papers 20489, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:20489
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    References listed on IDEAS

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    1. Anthony B. Atkinson & Thomas Piketty & Emmanuel Saez, 2011. "Top Incomes in the Long Run of History," Journal of Economic Literature, American Economic Association, vol. 49(1), pages 3-71, March.
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    3. Feldstein, Martin, 1995. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 551-572, June.
    4. Emmanuel Saez & Joel Slemrod & Seth H. Giertz, 2012. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 50(1), pages 3-50, March.
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    6. A B Atkinson & Andrew Leigh, 2010. "The Distribution of Top Incomes in Five Anglo-Saxon Countries over the Twentieth Century," CEPR Discussion Papers 640, Centre for Economic Policy Research, Research School of Economics, Australian National University.
    7. Sillamaa, Mary-Anne & Veall, Michael R., 2001. "The effect of marginal tax rates on taxable income: a panel study of the 1988 tax flattening in Canada," Journal of Public Economics, Elsevier, vol. 80(3), pages 341-356, June.
    8. Martin Feldstein & James M. Poterba, 1996. "Empirical Foundations of Household Taxation," NBER Books, National Bureau of Economic Research, Inc, number feld96-1.
    9. Peter Diamond & Emmanuel Saez, 2011. "The Case for a Progressive Tax: From Basic Research to Policy Recommendations," Journal of Economic Perspectives, American Economic Association, vol. 25(4), pages 165-190, Fall.
    10. Slemrod, Joel & Kopczuk, Wojciech, 2002. "The optimal elasticity of taxable income," Journal of Public Economics, Elsevier, vol. 84(1), pages 91-112, April.
    11. Thomas Piketty & Emmanuel Saez, 2003. "Income Inequality in the United States, 1913–1998," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(1), pages 1-41.
    12. Feldstein, Martin, 1995. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 551-572, June.
    13. Emmanuel Saez & Michael R. Veall, 2005. "The Evolution of High Incomes in Northern America: Lessons from Canadian Evidence," American Economic Review, American Economic Association, vol. 95(3), pages 831-849, June.
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    Cited by:

    1. Audra Bowlus & Émilien Gouin‐Bonenfant & Huju Liu & Lance Lochner & Youngmin Park, 2022. "Four decades of Canadian earnings inequality and dynamics across workers and firms," Quantitative Economics, Econometric Society, vol. 13(4), pages 1447-1491, November.
    2. Bev Dahlby & Kevin Milligan, 2017. "From theory to practice: Canadian economists contributions to public finance," Canadian Journal of Economics, Canadian Economics Association, vol. 50(5), pages 1324-1347, December.
    3. Garon, Jean-Denis & Paquet, Alain, 2017. "Les enjeux d'efficience et la fiscalité," L'Actualité Economique, Société Canadienne de Science Economique, vol. 93(3), pages 297-337, Septembre.
    4. Alexandre Laurin, 2018. "Unhappy Returns: A Preliminary Estimate of Taxpayers Responsiveness to the 2016 Top Tax Rate Hike," e-briefs 283, C.D. Howe Institute.
    5. Nicolas Zorn & Olivier Jacques, 2017. "Under the Rising Wave. How Disaggregated Revenue Sources Can Tell Another Story for Québec’s Top Income Share," Journal of Income Distribution, Ad libros publications inc., vol. 25(1), pages 1-25, March.
    6. Stephen Gordon, 2020. "The incidence of income taxes on high earners in Canada," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 53(2), pages 437-459, May.
    7. Liam C. Malloy, 2016. "Do Lower Top Marginal Tax Rates Slow the Income Growth of Workers?," LABOUR, CEIS, vol. 30(1), pages 61-87, March.
    8. Kenneth McKenzie, 2019. "Altering the Tax Mix in Alberta," SPP Research Papers, The School of Public Policy, University of Calgary, vol. 12(25), September.

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    More about this item

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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