It's a timeless principle of electioneering: there will never be a more politically appealing group to put in the taxman's crosshairs than the "super-rich."
It's no surprise that NDP Leader Jagmeet Singh recently targeted the wealthy in his party's major campaign planks and proposed a new one per cent wealth tax on families with more than $20 million in assets. According to an
analysis by the Parliamentary Budget Officer (PBO), this new tax could raise billions of dollars annually.
Money for the government kitty with millionaires and billionaires paying all the freight? Sounds like a slam dunk--until you start reading the fine print in the PBO's analysis.
First of all, the PBO notes that the "estimate has high uncertainty." Why is that? Among other things, "a large behavioural response is expected." That's economist-speak for "rich people will hire as many lawyers, accountants and tax planners as they need to minimize their tax burden."
Why does this matter? For starters, it undermines one of the intuitive reasons to go after the rich in the first place: that they're so flush with cash they'll barely even notice they're being asked to pay more.
Inconveniently, there's plenty of
evidence to the contrary: the richer you are, the more sensitive you are to tax increases, and the greater the likelihood you'll take steps to adjust your affairs accordingly to (legally) avoid them.
But let's set that aside. Nobody's shedding too many tears for the super rich. Surely it's still worth doing, even if it doesn't bring in as much cash as initially projected, right?
That's not the
conclusion many European countries have reached. Nine out of twelve countries that had a wealth tax in 1990, including France, Germany and social democratic stalwarts such as Sweden, Iceland and Denmark, have ditched them. The reasons include low revenues, high administrative costs, and--surprise surprise--an exodus of high net worth individuals.
A tax that yields little revenue (in the European cases, around 0.2 per cent of GDP) while having other negative impacts on the economy, makes for poor policy. This is especially true where it carries a high administrative cost to enforce, another inevitable feature of tax that relies on such a vast array of different assets. In Canada, an additional wrinkle is that our tax system is currently designed to tax individuals, not families, meaning that applying a family-based wealth tax would not be compatible with the overall tax system.
Finally, when rich people actually do pull up stakes and leave over taxes, it may be easy to simply wave goodbye while thinking "good riddance." But once we get past blowing off that emotional steam, we're still left with a problem. When the wealthy leave a jurisdiction, they're not paying any taxes there any more. Trying to squeeze a little more comes with the risk of getting nothing.
It's also worth noting that in many respects, we already have a wealth tax for at least one very common asset--real estate--in the form of municipal property taxes. That means imposing an additional wealth tax would simply be inviting the federal government to dip into what has long been understood to be a municipal revenue pool by hitting up the same taxpayers twice for the same asset.
Defenders of Singh's plan will point out this tax would only apply to those with more than $20 million in assets so most people shouldn't be too fussed. And while this may be politically shrewd--the richer the targets, the less sympathy they generate--from a policy perspective it is unwise to put so many eggs into such a small and mobile basket. Leaving the government's future revenue stream exposed to the behavioural responses of a very small group of people is risky, especially in contrast to alternative tax approaches that rely on a broader tax base.
Wealth taxes might sound like low hanging fruit, but don't be fooled. They can trigger problematic responses from the people they target. They're an administrative nightmare. And they just plain don't bring in as much revenue as their proponents hope.
(This column originally appeared in the Toronto Star)
