Something strange has happened on the way to the fall federal election: The Liberals have moved to the left of the New Democrats. By promising to raise taxes on wealthier Canadians – which would push the top marginal tax rate above 50 per cent in most of the country – the Liberals have embraced the kind of redistributionist dogma the NDP dropped a few years ago for the simple reason that it does not work.
Liberals say Conservatives ignore any data that do not validate their tough-on-crime, targeted-tax-cutting narrative. And the evidence suggests they are mainly right on that count. But the Liberal vow to raise the top marginal tax rate on Canadians earning more than $200,000 a year flies in the face of leader Justin Trudeau's rhetoric about adopting only "evidence-based" policy.
Almost no tax policy has been as thoroughly debunked as the idea that raising the top marginal rate above 50 per cent brings in more government revenue and mitigates income inequality. Outside the Nordic countries, which are exceptions for a host of idiosyncratic reasons, the "evidence" proves a tax rate above 50 per cent is a good way to ensure your rich folk become those of another country. You may reduce inequality, but mainly because your best and brightest put their earnings potential to use elsewhere.
Even NDP Leader Thomas Mulcair recognizes this. "Several provinces are now at the 50 per cent rate," he noted in 2013. "Beyond that, you're not talking taxation; you're talking confiscation. And that is never going to be part of my policies, going after more individual taxes. Period. Full stop."
The Liberals have no such reservations. The tax plan Mr. Trudeau unveiled this month includes a new 33 per cent federal tax bracket for incomes above $200,000, up from the current top rate of 29 per cent. This would increase the top rate in six provinces to beyond 50 per cent, topping out at 58.75 per cent in New Brunswick and more than 53 per cent in Ontario and Quebec.
The Liberals contend the new federal rate would bring in $3-billion annually, or just enough to offset their proposed reduction in income taxes on the middle-class. But calculating the impact of tax changes is not as straightforward as adding up all the income in a given bracket and multiplying it by the prevailing tax rate. Yet the Liberal math appears to amount to that.
Any corporate recruiter will tell you that it is harder to lure or retain talent when tax rates go up. But the biggest impact of higher taxes is a function of what economists call "the elasticity of income." The tax base shrinks as taxes go up because high earners resort more to tax avoidance – by changing their residency, sheltering income, getting paid in stock options or hiring even better accountants.
If they were looking for evidence, the Liberals could have consulted the recent British experience. In 2010, Gordon Brown's Labour government raised the rate on incomes above £150,000 ($284,000) to 50 per cent from 40 per cent. But the coalition government led by Conservative David Cameron cut it back to 45 per cent after a review by Nobel laureate James Mirrlees concluded: "It is not clear whether the 50 per cent rate will raise any revenue at all. There are numerous ways in which people might reduce their taxable incomes in response to higher tax rates; at some point, increasing tax rates starts to cost money instead of raising it."
That did not stop Labour leader Ed Milliband from vowing to restore the 50 per cent top rate. British voters reacted by fleeing the party in droves in the May 7 general election. Ed Balls, the finance critic and main champion of the return to a 50 per cent top rate, even lost his own riding.
Mr. Balls co-chaired the recent Commission on Inclusive Prosperity with former White House economic adviser (and the Liberals' current go-to economic guru) Lawrence Summers. The co-chair of Mr. Trudeau's economic council, MP Chrystia Freeland, also sat on the Balls-Summers commission, which called for many interventionist policies to tackle income inequality.
Like Labour in Britain and Democrats south of the border, Liberals here risk misreading the public mood with their all their talk of a "struggling" middle-class stymied by economic decks that are stacked and games that are rigged. Most middle-class Canadians do not feel that aggrieved. And they doubt higher taxes on anybody would solve anything.