Instructor’s Solutions Manual Chapter 1 – Solutions to Assignment Problems Solution to AP 1-1 There is, of course, no one solution to this problem. Further, student answers will be limited as, at this point, their understanding of tax concepts and procedures is fairly limited. However, the problem should provide the basis of an interesting discussion. What we have provided here are some suggested comments related to the various qualitative characteristics. Equity or Fairness The increase provides both horizontal and vertical equity. Individuals with the same income will receive the same treatment, while individuals with different income will be treated differently. Neutrality The increase is not neutral. It targets high-income individuals and is likely to influence their economic decisions. Adequacy While the increase was intended to create additional revenues, there is some evidence that the opposite has happened. This reflects the fact that individuals with high levels of income are sometimes in a position to move some, or all, of that income out of Canada (e.g., move their residence to the U.S.) and to engage in complex income splitting transactions. Flexibility With respect to flexibility, the rate can be changed at any time. However, as a practical matter, such changes would need to be on an annual basis. Simplicity and Ease of Compliance This change would not appear to present any compliance issues. Certainty The increase makes it clear to individual taxpayers the amount of taxes that they will be required to pay. Balance between Sectors Unfortunately, this change will increase the imbalance in the Canadian tax system between corporate and individual taxpayers. Before the change, individuals were already paying a disproportionate share of tax revenues. The intent of this change was to further increase this imbalance. International Competitiveness This increase further widens the gap between Canadian and U.S. income tax rates, making Canada far less competitive with the U.S. However, Canadian income tax rates are not out of line with income tax rates in other industrialized countries.