Evelyn Jacks: Should Top Incomes Be Subject To Higher Taxes?

As provinces in Canada attempt to add surtaxes to top earners in Canada, the most recent being Ontario in its defeated May 1 budget, a debate on whether top incomes should be subject to more tax continues. 

This month, the OECD jumped in with a study on the subject entitled “Focus on Top Incomes and Taxation in OECD Countries: Was the crisis a game changer?” 

The issue is that the total pre-tax income of the richest 1% has increased in most OECD countries over the last three decades, and while the financial crisis interrupted the rise, top incomes quickly recovered. In that time, top rates of personal taxes decreased in almost all the OECD countries. Not surprising, it was found that while most of these people had high wages, salaries, bonuses and stock options, they also had more disposable income for capital and business investment. These investments generated more income the richer people got. In Canada, for example, the richest of the rich receive about 20% of their income from capital; in France, that figure is almost 60%. 

Interestingly, reducing top rates of income taxes also reduces the incentive to engage in tax planning to avoid or evade taxes, the study found, leading to more income being declared for tax purposes. 

As governments struggle with tight budgets, the study suggests several options are available for increasing average tax rates paid by the rich without necessarily raising marginal tax rates. They include:

1. Abolishing or scaling back tax deductions, credits and exemptions that benefit the rich disproportionately.
2. Taxing all remuneration from employment, including fringe benefits and stock options as ordinary income (subject to full income inclusion)
3. Shifting tax mixes to rely more on recurrent property taxes
4. Reviewing new forms of wealth taxes, such as inheritance taxes
5. Improving transparency and tax compliance, particularly internationally
6. Broadening the base for income tax to reduce avoidance opportunities.   

It’s Your Money. Your Life. It’s quite possible we are currently within one of the lowest taxed periods for income, capital and transitioning wealth in this century. Professional advisors will want to take this into account in family transition planning sooner rather than later, because many options exist to preserve wealth, tax efficiently. This is the subject of our national think tanks starting in Winnipeg May 21 and then moving to Calgary, Vancouver, Toronto and Halifax. Please join us by reserving your spot by May 15.

Evelyn Jacks is president of Knowledge Bureau and author of 51 books on tax and personal wealth management. She will be speaking on the national Distinguished Advisor Workshop tour May 21-June 3. Follow Evelyn on Twitter at @EvelynJacks.