“While it won’t be the same workhorse of revenue generation that income or sales taxes are, a wealth tax is without question an effective way to decrease the inequality” that has recently been exposed by the COVID-19 pandemic, writes Shelia Block, a senior economist with the Canadian Centre for Policy Alternatives.
“The appeal of a wealth tax is based on fallacies that do not apply to Canada,” writes Philip Cross, a senior fellow at the Macdonald-Laurier Institute. “One is that wealth inequality is rising, which is clearly not the case over the past decade. Another is that better off Canadians are not paying their “fair” share of taxes.”
Canadian Centre for Policy Alternatives
There have been many hard lessons from this pandemic. Two of those lessons have a direct impact on public finances.
First, rather than being the “great equalizer” that many of us imagined in March 2020, COVID-19 has both exposed and worsened economic inequality.
Second, the pandemic has shone a harsh light on how urgently our public services need to be strengthened, including through increased public funding.
A wealth tax would be an important step forward in addressing both these challenges.
The available data point to increasing inequality. One year into the pandemic, the wealth of Canada’s billionaires had increased by $78 billion. That same year, at COVID-19’s peak, 5.5 million Canadian workers had lost their jobs or had their hours cut.
Recent research from David Macdonald with the Canadian Centre for Policy Alternatives shows that top executives of some of Canada’s largest companies saw their total pay in 2020 rise by an average of 17 per cent, or $171,000. And as of last week, the S&P/TSX composite index was up by almost 20 per cent year-to-date, showering stock market returns on the country’s wealthy. That’s all while recent Statistics Canada estimates show average hourly wages have barely moved.
At the same time, the pandemic has revealed the inadequacy of our public services, which have been underfunded for decades. We have seen the deadly consequences of inadequate staffing and overcrowding in long-term care. We have seen the lack of surge capacity in our hospitals result in critically ill patients being transferred far from their loved ones to receive care. We watched the federal government scramble to temporarily redesign and increase supports for people who lost employment, after the pandemic exposed that our threadbare social safety net was not up to the job.
Alongside a persistent pandemic entering its fourth wave, this summer’s heat waves and extreme wild fires have made it impossible to ignore the fact that the climate crisis will also require a herculean collective effort and massive public investments led by government.
Introducing a wealth tax in Canada is one of the tools to get ahead of both of the inequality crisis and the need to rebuild our public services.
In 2020, the Parliamentary Budget Office conservatively estimated that a wealth tax of 1 per cent on assets above $20 million would bring in $5.6 billion annually. Recent research by my colleague Alex Hemingway used more up-to-date assumptions, and estimates $10 billion would be generated annually from that form of a wealth tax. The federal NDP platform goes further, and proposes a 1 per cent wealth tax for those with assets over $10 million.
There is no more efficient way to reduce inequality and boost the economy than through funding public programs that people need. All within reach are things like affordable child care, ensuring high-quality and compassionate care for our seniors, funding a just transition to the zero carbon economy, or building enough affordable housing units to meet the need. But to do so, we need to redirect some of the wealth of this country to where it will do the most good.
A wealth tax will help us get there by making the tax system more progressive — and that will make it more fair.
While it won’t be the same workhorse of revenue generation that income or sales taxes are, a wealth tax is without question an effective way to decrease inequality. And, a $10 billion boost to annual public revenues would go a long way toward funding a national child care program (Budget 2021 proposed $30 billion in funding over five years), acting on climate change, or retooling the EI system permanently to better support workers.
Although some wealthy people will undoubtedly spend a great deal of money and effort to avoid paying a wealth tax, vigilant and effective enforcement will reduce avoidance and evasion.
There is a reason why a wealth tax is popular in the polls. The pandemic has given us all a chance to reflect on the glaring inequality that surrounds us in Canada. It encompasses some of the largest issues that are preoccupying Canadians: affordability and housing.
A wealth tax is part of the solution. Not only would it help rebuild public services that make life better and more affordable for us all, it would also be a signal that those who want to form the next government are serious about building a more equal Canada.
Despite its easy political appeal, a wealth tax in Canada is not needed and would not deliver either the promised increase in tax revenues or a reduction in inequality. High income Canadians already bear a disproportionately large share of taxes. It is a fantasy that the huge costs of the pandemic will not be shared by all Canadians.
Wealth inequality is declining, not increasing, in Canada. The wealth held by the lowest three income quintiles rose more than for the upper two quintiles, boosting their share of wealth from 27.1 per cent in 2010 to 29.5 per cent in 2019 (all data are from StatsCan). The myth that inequality is rising here is a prime example of a narrative imported from the U.S. without adjusting for the local conditions in Canada.
Rising wealth for lower income people reflects gains in both financial and non-financial assets. Our middle class holds more financial assets than in the U.S., making it less vulnerable to lower housing prices.
Wealth taxes have proven costly to administer and generate little revenue. As a result, eight of the 12 European nations that imposed a wealth tax ended up abandoning it. In practice, wealth is difficult to define, measure, and tax. Two-thirds of wealth is held in housing and pension assets, which are usually exempt from a wealth tax because they are widely held. As a result, wealth taxes are applied to a narrow range of assets, the value of which often is difficult to establish.
On top of its narrow base, the tax rate on wealth must be low. This is partly because a wealth tax is equivalent to a punitive tax on capital income. An additional complication is that it must be paid even when income is low, as occurs during recessions. This strain is especially severe for new small firms, which often lack capital.
A wealth tax creates a substantial incentive to shift assets to jurisdictions without such a tax. This happens regularly because of the ease with which many taxable assets can be shifted across borders. Even wealth tax advocates, like the French economist Thomas Piketty, admit that “the risks of evasion would be very high” without the widespread sharing of bank information that has proved difficult to implement.
Much of the recent increase in wealth reflects a decade of easy monetary policies. These policies were partly designed to boost asset prices and household wealth. It would be contradictory and hypocritical for governments to encourage higher wealth with monetary policies and then tax it with fiscal policies. If governments decide the increase in wealth is not productive or unfair, they should reverse the policies that help boost asset prices.
Besides being ineffective, wealth taxes dampen savings and investment and slows long-term growth. This is the wrong message to send as Canada struggles to recover from a decade of subpar growth and its worst recession since the 1930s.
The appeal of a wealth tax is based on fallacies that do not apply to Canada. One is that wealth inequality is rising, which is clearly not the case over the past decade. Another is that better off Canadians are not paying their “fair” share of taxes.
On the contrary, the top 1 per cent earn 10 per cent of all income while paying 21.3 per cent of income taxes in 2018. Similarly, the top 5 per cent received 23.1 per cent of income and paid 40.8 per cent of taxes. The top 10 per cent garnered 34.2 per cent of income while shouldering the burden of 54.2 per cent of all taxes. By comparison, the bottom half of all Canadians pay 5 per cent of taxes while receiving 18 per cent of incomes.
Canada already has a highly progressive income tax system where upper income earners pay a disproportionately large share of taxes.
Finally, it is a myth that well-off Canadians are taking a larger share of incomes while avoiding paying their share of taxes. More broadly, a wealth tax feeds the fantasy that the huge bill from the pandemic can be shifted to a tiny number of rich Canadians, while leaving the average person unaffected.
Inevitably, all of us will be impacted by either lower government spending or higher taxes. That should be the focus of the federal election, but neither our politicians, nor the public, appear willing to grapple with that reality.