Higher taxes on rich may miss revenue targets, experts say

Some leading Canadian public finance economists are questioning whether the Gallant government can raise anywhere near the $30 million it has budgeted from its new taxes on the wealthy.

"It assumes that the people who have access to the best tax advice in Canada are going to fail to take it," said Kevin Milligan, an economist at the University of British Columbia.

"I don't think that's a great assumption. I would be very cautious in expecting a large revenue windfall."

Finance Minister Roger Melanson established two new high-income tax brackets in his budget to generate $30 million in new revenue.

New Brunswick's new top rate, for taxable incomes above $250,000, was set at 25.75 per cent. That's the highest in the country and 80 per cent more tax than the province was charging at that that income level just three years ago

Jack Mintz, an economist at the University of Calgary, a long-time tax adviser to both Liberal and Progressive Conservative governments in New Brunswick, says studies at the federal level show raising rates on high-income earners increases the use of shelters and other tax avoidance techniques.

"Raising the [top] rate is really done for more fairness reasons than for revenue reasons because you don't raise that much revenue at all," said Mintz.

"It would be nice if we had evidence-based public policy."

New Brunswick's top rate on high incomes was just 14.3 per cent three years ago.

Study shows likely increase in tax shelters

In a study published last summer, Milligan and Michael Smart, an economist at the University of Toronto, modelled what would happen if the province raised that rate five points to 19.3 per cent and found that high-income earners would likely shelter over half of the expected increase in revenue.

Raising tax rates well above that, to 25.75 per cent, only increases the likelihood that high-income earners will seek to shelter their money according to Milligan.

"When you're looking at paying thousands of dollars more in tax that's going to be part of most people's decision process when they have a bunch of options to consider," he said.

New Brunswick has about 2,000 residents with incomes above $250,000.

Rhys Kesselman, an economist at Simon Fraser University in Burnaby, B.C., said the New Brunswick government can expect many wealthy individuals to seek out every legal and accounting means available to shelter income from the new high rate.

Kesselman said the provincial government should consider the possibility it will raise far less than the $30 million it has budgeted, including the possibility of nothing at all.

"It's an estimate that's probably a naive estimate,ignoring behaviour response [of the taxpayer]," said Kesselman.

"If there's behaviour response maybe it'll end up being half that and conceivably negative.I can't say for sure it wouldn't be."