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President Obama's proposal to increase taxes on those earning more than $1-million may help him persuade U.S. voters that his government is trying to do something to attenuate the increasing trend to which incomes have been concentrated among a very small group of high earners. But as the article notes, this measure is not expected to be an important source of government revenues.



This is also the case for Canada. Even though incomes are increasingly concentrated among high earners, a 'tax on millionaires' is unlikely to generate much new revenue. What follows is very much a back-of-the envelope exercise, but it should provide a rough order of magnitude for the sort of revenues we could expect from a similar proposal in Canada.



According to the most recent data from 2007, the top 0.1 per cent of the distribution earned at least $620,000 a year and received 5.5 per cent of all income. Checking this against data from the Canadian Revenue Agency, this means that 23,549 people earned $52.2-billion -- an average of $2.2-million. In 2007, the threshold above which the top federal tax rate of 29 per cent applied was $121,000.



So let's think of what we could expect from -- say -- increasing the marginal tax rates on incomes above $500,000 a year. Let's also make the assumption that everyone in the top 0.1 per cent would be affected by this measure, and make the -- simplifying, conservative and heroic -- assumption that these taxpayers would claim no deductions from total income.



23,549 people times $500,000 equals $11.8-billion, so the tax would be applied on a base of $52.2 billion – $11.8-billion = $40.4-billion. This means that each percentage point applied to incomes above $500,000 per year would bring in at most $400-million. (Recall that this number assumes that these high earners would claim no deductions).



According to the OECD, the top marginal tax rate in Canada was 46.4 per cent -- this includes a weighted average of the various provincial rates. An additional 10 per cent on high incomes would have given Canada one of the highest top marginal tax rates in the OECD, behind only Denmark and Sweden (although it should be noted that the top rates in these countries kicks in at a lower threshold).



Even if we made another simplifying, conservative and heroic assumption to the effect that high earners would do nothing in the face of these higher tax rates beyond swallowing hard and writing bigger numbers on the cheques they sent to the Receiver-General, this sort of measure would have produced something like an additional $4-billion.



To put this number in context, GST revenues for the fiscal year 2007-08 -- when the GST rate was 6 per cent -- were $30-billion. In other words, one GST point brought in $5-billion.



It may be a good idea to introduce another tax bracket on high earners on the grounds of fairness and equity. But we should be under few illusions about just how effective these measures would be in terms of generating more revenues.



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