Milligan-Smart project on taxation in federations Kevin Milligan ~ Vancouver School of Economics ~ University of British Columbia

Milligan-Smart project on taxation in federations

This work is joint with Michael Smart, University of Toronto.

Four papers:
[CJE article]
[Devolution of Revolution draft]
[Musgrave vs. Oates draft]

"Provincial Taxation of High Incomes: The Effects on Progressivity and Tax Revenue"

in David A. Green, W. Craig Riddell, and France St.-Hilaire (eds.) Income Inequality: The Canadian Story. Montreal: McGill-Queen's University Press (2016).
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Seven Canadian provinces have introduced new tax brackets for high earners since 2010. Kevin Milligan and Michael Smart explore the consequences of these decisions and their effectiveness as a policy response to inequality. In particular, they examine what would happen if each province were to increase by 5 percentage points the top marginal rate paid by top-1-percent earners, taking into account their behavioural response to a tax hike. If taxfilers respond to higher tax rates by stepping up their use of tax shelters or by shifting income out of the jurisdiction, it will reduce reported income and generate less tax revenue than anticipated. Milligan and Smart find substantial responsiveness to provincial tax increases on top incomes, suggesting that revenue expectations from such increases should be modest. The impact on average tax rates would also be small, because the higher rate would apply only to the portion of income that exceeds the threshold for the top-1percent tax bracket. This means that increasing provincial tax rates on top incomes would reverse only a small fraction of the increase in income concentration seen over the last 30 years. Moreover, the revenue to be gained from higher rates on the top 1 percent would vary substantially across Canada. Provinces with a greater concentration of income at the top of the distribution and lower prevailing tax rates would stand to gain the most. Finally, they point out there would also be revenue consequences for the federal tax base, which might shrink as a result of provincial highincome tax-rate increases.

Chapter pre-release here. (Nov 2015)
Paper-- here. (Updated August, 2014)
Slides-- here.
Publisher website for the book here.

"Taxation and Top Incomes in Canada"

Canadian Journal of Economics, Vol. 48, No. 2, pp. 655-681 (2015).
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We estimate the elasticity of reported income with respect to tax rates for high earners using sub- national variation across Canadian provinces. We argue this allows for better identification of tax elasticities than the existing literature. We find that elasticities of reported income at the provincial level are large for incomes in the top one percent, but small for lower earners. There are strong in- dications that the response happens both through earned and capital income. While our estimated elasticities are large, changes in tax rates cannot explain much of the overall long-run trend of higher income concentration in Canada.

Published version here.
Final Draft here.
Slides here.

"Devolution of the Revolution: Taxation of High Incomes in a Federation"

This prelminary paper was presented a few times but we retired it as a draft. It has been cited a few times, so we post it here for reference. We built some of the inisghts into the 'Musgrave vs. Oates' paper below, which is now under submission.
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We develop a theory of cross-border income shifting in response to personal taxation, and examine its implications for the revenue potential and excess burden of personal taxes at the subnational level. We estimate the elasticity of tax avoidance and of cross-border tax base shifting using data on top income shares for Canadian provinces around a significant reform in subnational taxation in Canada. According to our estimates, shifting taxable income between provinces accounts for a substantial share of total tax avoidance in response to unilateral provincial tax changes. Implications for design of federal income tax policies are discussed.

Paper-- here. (September, 2013)

"An estimable model of income redistribution in a federation: Musgrave meets Oates"

American Economic Journal: Economic Policy, Vol. 11, No. 1 (2019). Google Scholar


We develop a theory of cross-border income shifting in response to subnational personal taxation in a federation and examine its implications for the excess burden of personal taxes. We show how a properly-chosen federal tax rate can offset the fiscal externality between states and facilitate decentralization, even in a heterogeneous federation where unitary taxation is suboptimal. Optimal taxes depend on the elasticities of national tax avoidance and of cross-state tax base shifting. We estimate these elasticities around a tax decentralization reform in Canada, finding both to be empirically relevant. We discuss the implications for optimal federalism.

Draft Paper-- here. (updated November, 2017)

Final Pre-publication draft-- here. (updated June, 2018)

Data and programs for final draft -- here. Return to Research Page. ~ Home Page ~ Vancouver School of Economics ~ UBC
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