ECON 3C03 McMaster Public Sector Economics Optimal Income Taxation Calculations

Question Description

I’m working on a economics question and need an explanation to help me learn.

Since 2010, the federal government and many provinces have increased thetax rate on top income earners. This question asks you to think aboutwhether these policies were a good idea. In a 2015 paper titled Taxationand Top Incomes in Canada, Kevin Milligan and Michael Smart estimatedthat the elasticity of taxable income (ETI) for the top one percent of incomeearnings in Canada is ?z = 0.51.

(a) The income cutoff to be in the top one percent in Newfoundland is$168,094 (or $168.094 thousand dollars) and the average taxable income re-ported by individual tax filers in the top one percent is $283,720 (or $283.720thousand dollars). In 2015, 4,170 individual tax filers were in the top onepercent in Newfoundland. Suppose that the province is interested in in-creasing its top marginal rate from ? to ? + ?? , where ?? is a small positivenumber. What is the Mechanical effect of this tax reform (i.e. calculate M)?

(b) The current top marginal tax rate in Newfoundland (federal + provincial)is 43.0%. Using the ETI estimate provided, what is the Behavioral effect ofthis tax reform (i.e. calculate B)?

(c) How many provinces experience an increase in tax revenue because of thisreform? In 3-5 sentences, describe some of the similarities among provincesthat experience an increase in tax revenue?

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