MGEC31H – Economics of the Public Sector: Taxation
Your paper must be no longer than 1500 words (about 5-6 typed double-spaced pages, using normal margins and normal print). Longer papers will be penalized. The penalty will increase with the amount that you exceed the limit (naturally, there will be no penalty for slightly exceeding 1500 words, but the point at which the penalty will be assessed is not specified, as is true for many legal penalties!). At the bottom of your paper you must state the number of words in your paper (Microsoft Word provides this information under Tools, subheading Wordcount; other wordprocessing packages also provide this information; you may omit the references from your wordcount if you like; be honest, because we have been known to count words!).
The paper is worth 10% of your final grade. It will be graded generously, but attention will be paid to grammar and to a logical development of your argument.
In general you may want to do some additional research for the paper (beyond the reading list). I have suggested some sources below, but because the paper deals with an issue that is real and recent, you can probably find lots of discussion of the taxation issues by using the normal search engines on the Internet. If you are having trouble finding out what you need, ask a librarian for help. You should of course provide complete references and footnotes, even to works from the reading list. Do not plagiarize. Cheating will be dealt with severely. Keep in mind that this is a paper in Public Finance, not in Tax Law or Tax Accounting – a good grade will depend on your ability to tie your analysis into the concepts learned in this course. In the past, students with access to a trained accountant (eg. relatives) have occasionally turned in papers that present an analysis of the issues that is not particularly useful in this course.
A separate note on use of the internet: Many students use the internet to do research, in this and other courses. This is fine, but you should carefully footnote references, just as if you had taken a book out of the library. Copying material off an internet site and representing it as your own is plagiarism, and the University takes that very seriously. You should also be aware of the obvious point that the internet does not have anyone controlling it. Often very useful sources will appear on your search engine side-by-side with sites that are complete garbage. It is your task, if you use the internet, to differentiate between the two! Librarians can help you do that. We have a librarian who works specifically with Management and Economics students, and she would be happy to assist you.
The detailed assignment for the paper is found below.
The paper should address the issue of a separate tax system for Ontario. As you have learned, Ontario assesses tax by having taxpayers fill out a separate form calculating the tax. In the past, Ontario simply determined its tax by taking a straight percentage of the federal tax, a system still used by some provinces (this approach is sometimes called a “tax-on-tax” or TOT system). A number of years ago (about 20), Ontario went to a separate calculation, but still uses the federal definition of taxable income (this is called a “tax-on-income” or TOI system). In contrast, Quebec has taxpayers fill out an entirely separate tax return, defining taxable income differently than the federal government does (the Quebec system has been in effect far longer than Ontario’s). Some people think that Ontario should follow Quebec’s lead, and move to a separate tax return; other people believe that Ontario has already gone too far, and that the complications in doing separate calculations impose a needless cost on taxpayers.
Your paper should begin by detailing some of the ways in which Ontario’s calculation of tax liability differs from that used by the federal government. Look at three different taxpayers in three different income categories: a low-income taxpayer with income of $30,000; a middle-income taxpayer with income of $80,000; and a high-income taxpayer with income of $300,000. Keep the calculations relatively simple by ignoring all deductions and credits except the basic personal amount. That is, ignore any C.P.P. or E.I. contributions and all Ontario property and sales tax credits, as well as the Ontario tax reduction. Compute the average and marginal tax rates for each taxpayer first for the federal system alone, and then for the provincial system alone. In practical terms, does it matter very much (that is, would the net results for the three taxpayers be much different if Ontario simply used a TOT system rather than a TOI system)? Is the Ontario system more or less progressive than the federal system (note that it is quite hard to compare progressivity between tax systems, so you may only be able to make some general statements here)? In what other ways does the Ontario system differ from the federal system? What are the advantages and disadvantages of having a separate tax calculation (as opposed to a TOT system)?
You should then go back and try to determine why Ontario made this change. This will be hard (I did not turn up much in a casual search), so it is OK to speculate on why this happened. Do you think it was a good idea or a bad idea? Explain your reasoning.
Finally, why does Quebec go even further than Ontario in breaking its system away from the federal system? Should Ontario move closer to the Quebec model (explain why or why not)? Interestingly, in the area of consumption taxes, Quebec and Ontario for a long time went in opposite directions. That is, Quebec harmonized its provincial sales tax with the G.S.T. very early on, while Ontario had a separately defined sales tax base until very recently. Comment on this apparent paradox − that is, on the fact that Quebec has chosen to have a less harmonized income tax, but was very quick to adopt a more harmonized sales tax.
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