Taxation is part of the love-hate relationship that Quebecers have with the role of the state. On the one hand, we attach importance to generous public services, but we reconsider this importance each time it comes time to pay.
Taxation affects behavior in the labor market. Its modulation partially determines work incentives. Its modulation also affects inequalities. On the one hand, there is an incentive to work and produce more, on the other, there is a desire to reduce the wealth gap. These two dimensions are generally contradictory, in the sense that a more efficient tax is generally less redistributive (and vice versa).
It is impossible to express which dimension to prioritize without expressing a political preference. The parties more to the left propose a more redistributive system while those more to the right will favor efficiency. Victor Hugo wrote “tell me who you love and I will tell you who you are”. In taxation, we should say “tell me how you tax and I will tell you what you prefer”.
The Coalition avenir Québec (CAQ) proposed a substantive tax cut during the election campaign. This reduction is spread over several years and the reduction in rates proposed is uniform.
The consequence of this proposal is that the tax savings will be progressively greater among high-income earners. In essence, this proposal promotes economic efficiency, at the cost of greater inequality.
Notable fact: this political party of course won the elections.
As much impact as possible
If we take note of the election results and subscribe to the idea of promoting efficiency by lowering taxes, can we have more impact than the original proposal? Summary in terms of resource allocation: for a given amount used for tax cuts (say 1 billion), how can it be “spent” in order to have the greatest possible impact? This question is central to the economic theory of taxation.
Short answer: efficiency is maximized by focusing on people with reported incomes between $30,000 and $55,000. Three reasons support this income range. First, the effect of a tax cut on lower-income people is less significant on the labor supply: spending would have little impact on efficiency. Second, the effect of tax cuts on high-income earners has too little impact on their well-being: the additional dollars of income have much less impact than the first dollars. Finally – and this is the most important element – the structure of all the income support programs, combined with the two tax systems, ensures that the tax burden increases most rapidly for people whose income is between $30,000 and $55,000. (In the jargon, the implicit effective marginal rates are said to be the highest.)
It is in this income range that the impact of a tax cut is the most structuring in terms of efficiency, because it is also in this range that the tax burden is most felt in the decision to work. more or not.
Changing the tax burden only in this income range takes a bit of creativity. Quebec’s marginal tax rates do not specifically target these taxpayers. The most successful approach would be to use a concept similar to the tax shield tax credit to limit tax progression specifically to this income range. Since what you call it matters, I suggest we call it the “tax efficiency shield”. A beautiful legacy, for a government!
The electoral results reveal a majority preference for efficiency. The above proposal has more impact in terms of economic efficiency than the original electoral proposal. It is also less damaging in terms of increasing income inequality. Certainly, an increase in efficiency comes at the expense of income inequality, but a careful proposal as to how to go about it will also attempt to do so in a way that this increase in inequality is less significant.
Is refocusing the tax cut to be both more efficient and less inequitable a broken promise? Obviously, it’s not me who decides, but here’s my hope: I hope not.