Instructor’s Solutions Manual Chapter 1 – Solutions to Assignment Problems Solution to AP 1-1 Although there may not be one single solution to this problem, and student answers will be limited to their preliminary understanding of income tax concepts and procedures, this problem provides the basis for an interesting discussion of 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 high-income individuals 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 income tax 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. personal 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.