The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1988 Tax Flattening in Canada

Federal tax reform in 1988 flattened the Canadian personal income tax schedule, changing the marginal tax rates for many individuals. Using methods similar to those applied by Auten and Carroll (1999) in the study of the effects of the 1986 U.S. Tax Reform Act, we estimate the responsiveness of income to changes in taxes to be substantially smaller in Canada. However we find evidence of a much higher response in self-employment income, in the labour income of seniors and from those with high incomes.