An Evaluation of the Efficacy of a Canadian Wealth Tax

Opinion by Callum McAllister.

An adding machine atop a yellow background

A key feature of the New Democratic Party’s (NDP) platform in the last federal election was a proposed wealth tax policy that would see any wealth savings over $10 million taxed at 1 per cent per year. According to Abacus Data, approximately 89 per cent of Canadians are in favour of a wealth tax policy [1]. Canadians commonly cite two reasons for supporting such a policy: 1) to combat rising economic inequality; and 2) to raise government revenue. To evaluate the wealth tax policy, each of these reasons will be dissected.


It is a common misconception that economic inequality in Canada is increasing. In reality, the Canadian income gap has been decreasing for several years. As of the most recent data collection in 2019, the Gini coefficient (a measure of a country’s economic inequality) has been on a downward trend and is currently at its lowest level since 1995 [2]. The COVID-19 pandemic over the last two years may have altered this trajectory. However, it is presumable that a similar downward trend in economic inequality will appear once Canada returns to pre-pandemic economic conditions. Hence, economic inequality cannot be the sole justification for a tax on wealth as the current Canadian economic structure successfully reduces inequality.


Rising debt due to COVID-19 and large spending projects in response to crises such as climate change and housing have necessitated increased government funds. Estimates show that a wealth tax has the potential to generate a significant revenue flow for the government. According to the Parliamentary Budget Officer, the NDP’s wealth tax proposal would garner approximately $10.9 billion in one year and a total of $60 billion if the tax was employed from now until 2026 [3].


While the above prediction portrays a positive outlook, wealth taxes have not proven effective. For one, it is not only extraordinarily difficult to accurately measure wealth due to its storage in such things as property, jewelry, art, stocks, and foreign bank accounts, but it is also costly to administer. In fact, of the twelve countries which employed wealth taxes since 1990, eight of them have since repealed the policy due to efficiency and administrative concerns in addition to low revenue yields [4].


Even if efficiency and administrative concerns were addressed, there remains the impact of capital flight as wealthy individuals would be further incentivized to leave Canada or move their wealth abroad. This not only reduces the revenue that could have been extracted through the wealth tax but also other currently employed forms of taxation such as those on property and inheritance. Moreover, as wealth is moved abroad, less capital is injected into Canada’s economy because there are fewer wealthy individuals participating as consumers. This was seen recently as the French government removed a wealth tax in 2017 after the government estimated that it had caused over 10,000 wealthy individuals with 35 billion EUR in assets to leave the country [5].


Regardless of these practical concerns, there remains a question of if the tax is desirable. Canadian citizens have already been taxed on the accumulation of their wealth through processes such as the income or inheritance tax. Thus, the government would be taxing capital that has already been taxed. Currently, there is a precedent that once an individual has their income taxed, the remaining income becomes their financial property. If they choose to spend or transfer that financial property, then it becomes susceptible to taxation again, but if they choose to save it, then it is protected from government interference. A wealth tax policy would break this precedent and enable the government to reserve far more control over an individual’s private financial property. Although this would only apply to incredibly wealthy individuals, once the precedent is set, it is not unforeseeable that the currently proposed $10 million threshold becomes $5 million, $2 million, and so on.


Ultimately, evaluating the wealth tax policy is not simply a question of whether it is practical and principally justified, but if it is the most efficient policy to increase government revenue. Increasing proven and efficient methods of taxation such as the income tax should be preferred to employing a wealth tax which: 1) has a historical record of being impractical and inefficient; 2) translates to capital flight; and 3) increases the government’s capacity to interfere with an individual’s financial property.

 

Bibliography


[1] Abacus Data. “Canadians think their tax system is unfair and support new revenue tools that bring down the deficit and reduce inequality now.” August 4, 2021. https://abacusdata.ca/tax-fairness-canada-poll/


[2] Statistics Canada. “Canadian Income Survey, 2019.” March 23, 2021. https://www150.statcan.gc.ca/n1/daily-quotidien/210323/dq210323a-eng.htm


[3] Office of the Parliamentary Budget Officer. “Cost Estimate of Election Campaign Proposal.” September 4, 2021. https://www.pbo-dpb.gc.ca/en/epc-estimates--estimations-cpe?epc-cmp--eid=44&epc-cmp--cid=128


[4] OECD. “The Role and Design of Net Wealth Taxes in the OECD.” OECD Tax Policy Studies 26 (2018): 1-114. https://doi.org/10.1787/9789264290303-en


[5] Rose, Michel. “Macron fights ‘president of the rich’ tag after ending wealth tax.” Reuters. October 3, 2017. https://www.reuters.com/article/us-france-tax/macron-fights-president-of-the-rich-tag-after-ending-wealth-tax-idUSKCN1C8