The Fiscal and Distributional Impact of Changes to the Federal Personal Income Tax Regime

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The Fiscal and Distributional Impact of Changes to Personal Income Tax

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The member for Rimouski-Neigette-Temiscouata-Les Basques, Mr. Guy Caron, requested that the Parliamentary Budget Officer analyze the fiscal and distributional impact of two changes to the federal personal income tax (PIT) regime announced by the government in December 2015:

1.       Introducing a 33.0 per cent PIT rate on taxable income over $200,000, effective January 1, 2016.

2.       Reducing the PIT rate on the second tax bracket (taxable income of $45,283 to $90,563 in 2016) from 22.0 per cent to 20.5 per cent, effective January 1, 2016.

The member also requested that the change to the second bracket be compared to an alternative:

  1. Reducing the PIT rate on the first income tax bracket from 15.0 per cent to 14.0 per cent (up to $45,282 of taxable income in 2016), starting on January 1, 2016.

PBO estimates the net primary impact as the increase (or decrease) in federal revenues and expenses resulting from tax rate changes applied to the existing tax base. PBO further estimates a behavioural response of taxfilers to the new lower (or higher) marginal tax rates based on assumptions for the elasticity of taxable income. The net primary impact in combination with the behavioural response is equal to the expected net fiscal impact on the government’s budget balance.

PBO estimates that the net fiscal impact of the first two changes will reduce PIT revenues by $0.4 billion in 2015-16 and about $1.7 billion annually on average from 2016-17 to 2020-21. That is, the estimated revenue gains from introducing a new tax rate of 33.0 per cent on taxable income over $200,000 fall short of covering the estimated loss in revenues from reducing the PIT rate on the second tax bracket by $8.9 billion from 2015-16 to 2020-21. Reducing the first personal income tax rate from 15.0 to 14.0 per cent would reduce revenue by $0.9 billion in 2015-16 and about $4.1 billion on average annually from 2016-17 to 2020-21. 

Introducing the new tax bracket for taxable income over $200,000 at a rate of 33.0 per cent will affect taxpayers in the top decile.  The top 1.4 per cent of taxpayers will pay an additional $5,255 on average. The second bracket change will affect 43 per cent of taxpayers, and primarily the top 30 per cent of earners.  The first bracket change will affect the most number of taxpayers with tax savings distributed across the top 60 per cent of earners.