Soak The Rich? Tax Revenues Might Just Dry Up

In 2012, French President Francois Hollande was elected on platform that included a prominent proposal to increase a range of taxes, including an eyebrow-raising increase on high income earners to 75 per cent. Facing a huge public debt of some €84 billion, Hollande’s view was that taxing the rich more would help close the gap.

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The policy flopped. The tax hikes had been projected to bring in €30 billion, but ended up raising only half that amount. From the 75 per cent income tax specifically, only an estimated €260 million was raised in 2013, dropping to just €160 million in 2014. Many well-off French citizens moved away, and many more found creative ways to dodge the tax man. Hollande threw in the towel and conceded defeat, and the hike was rescinded on January 1 of this year. This lesson should be instructive for any Canadian politician with plans to pick the pockets of the well-off as an easy and politically popular way to fill government coffers and pay for new (or bigger) government initiatives. The reality is “the rich” in Canada already pay a whole lot of money in taxes and trying to take more isn’t just wrong – it’s also futile. According to the 2013 federal budget, the top 20 per cent of income earners in Canada paid 75 per cent of all income taxes collected – and the top 1 per cent paid 20 per cent of all income taxes collected! We hear a great deal about the growth of inequality in Canada, but very little about the fact it is also reflected in the beneficiaries shouldering an increasingly disproportionate share of the tax burden. It is one thing to argue that a person earning ten times the average salary should pay more than ten times the taxes, but should someone earning ten times the average really pay 20 times the taxes? The recent French experience is just one example of policies that aim to squeeze more money out of “the rich”, yet are often doomed to result in a raft of unintended consequences. Firstly, rich people have far more resources at their disposal to hire tax and law specialists to help structure their earnings in such a way as to minimize their tax burden. Secondly, punitively higher taxes reduce the incentive for people to work harder: why put in that extra hour at work or open that second location of your coffee shop, if the government is going to take 75 per cent of what you make? As for business taxes, in an increasingly globalized world, putting them up too high can trigger some companies to cease doing business in Canada, or move away altogether – and take would-be tax revenues with them. Regardless, as France has discovered to its chagrin, the damage done from developing a reputation as a high-tax jurisdiction which is hostile to business is likely to far outweigh any extra revenues raised. Advocates of “soak the rich” policies live in a theoretical world where incentives have no impact on future behaviour. The reality is far more sobering.