The NDP’s Wealth Tax: What the Experts Say | The Tyee

The NDP’s promised wealth tax on the ultra-rich would be a new step to reduce economic inequality in Canada, but quite a modest one compared to proposals being debated south of the border.

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And while enthusiasm for a wealth tax is understandable when economic inequality is higher than it’s been since the 1920s, there are better ways to structure the tax system, said David Duff, a University of British Columbia professor who is an expert on tax law.

“I’m not a huge fan of wealth taxes,” Duff said. “Although in principle I would be opposed, I can understand the context for this… We live in a world where we have not taxed, in particular, capital income, certain kinds of income, to the same extent that we tax labour income.”

Policies like taxing capital gains at half the rate of other forms of income or allowing CEOs to be paid in stock options have allowed some people to accumulate large fortunes.

The NDP’s wealth tax would charge one per cent each year on the value of household assets above $20 million. It’s the only party proposing such a tax.

“It’s a wealth tax on those who are very, very, very wealthy,” NDP leader Jagmeet Singh told The Tyee.

The idea is to make sure people at the very top would pay their fair share, he said. The tax would raise about $9 billion a year from fewer than 2,000 people, Singh added.

Reaction to the proposal to tax wealth has been mixed, with progressive commentators more positive than conservative ones.

A column by Matthew Lau in the Financial Post called the proposal “class warfare” and said, “The NDP’s plan for a wealth tax, however, breaks a sort of glass ceiling on the worst taxes proposed in Canada.”

Another Financial Post piece by Montreal Economic Institute researcher Gaël Campan said that while the proposal sounds good, it would be a “tragic mistake.” (The institute has been described as “a kind of Fraser Institute in Quebec.”)

Campan drew on the experience with a similar tax in France to conclude “a wealth tax is a demagogic ploy that ends up being counterproductive.” He argued rich people would move to tax havens to avoid a wealth tax.

Two retired economics professors, Robin Boadway from Queen’s University and Pierre Pestieau from the University of Liège wrote in the Globe and Mail that a “well-functioning capital-income tax renders an annual wealth tax unnecessary. The benefits do not compensate for the significant administrative costs that would be involved.”

Canadian Centre for Policy Alternatives senior economist David Macdonald, meanwhile, argued that the proposal addresses the rise in economic inequality that he and others have long tracked in Canada.

“The wealthiest families in Canada — representing fewer than 100 families, each with net worth over $1 billion — have accumulated more wealth than the bottom 12 million Canadians combined,” he wrote. Those 100 families would pay half the amount that the NDP’s tax would raise.

Macdonald did sound a warning. “Because this tax applies to a very small group of very well-resourced people, their accountants will be busy looking for ways to avoid or at least mitigate it, as the wealthy in other countries have successfully done,” he wrote.

“For legislation of this sort to be effective it would have to be strong, with loopholes identified and quickly shut down, which can certainly present challenges.”

Erika Beauchesne of the advocacy group Canadians for Tax Fairness wrote that while her organization has been promoting an inheritance tax that would apply at death instead of annually, action on inequality is needed.

“The question and debate should no longer be whether we have increased taxes on wealth and capital, but what form they should take,” she wrote. “We should thank the NDP for getting this debate going in Canada and look forward to seeing what other federal political parties propose.”

UBC professor Duff said his preference would be to improve the income tax system so money is taxed more fairly when it is earned. It could make sense to launch temporary tax measures “to deal with the fact a lot of wealth has been accumulated without adequate taxation on that,” he said.

Wealth taxes are notoriously difficult to administer, especially when it comes to assessing the value of privately held companies or assets like art, he said. Wealth taxes create “weird incentives” to move wealth into forms that may be more difficult to monitor and less productive, he added.

“I would prefer to have a bigger debate about inheritance taxation that’s dropped off the map a bit,” Duff said. While wealth taxes are applied to money people have saved, inheritance taxes are applied to money a person receives thanks to the good fortune of being born into family where somebody else made a lot of money.

“Vast inheritances are a residual of a feudal society. You’re getting a huge advantage in life without it being earned,” he said.

While it makes sense to allow people to provide something for their children, “at a certain point it’s too much and it’s problematic… It creates grossly unequal opportunities and there’s no merit to it. It’s not deserved, these types of inheritances.”

Canada had an estate tax that was repealed in 1972, but since then it has become an untouchable topic for politicians.

“It needs someone who will advocate it on a principled basis,” Duff said.

The discussion about wealth taxes in Canada echoes the debate in the United States where two of the leading candidates for the Democratic presidential nomination are proposing to tax wealth.

Elizabeth Warren is pitching a two-per-cent annual tax on a household’s net worth over $50 million and three per cent over $1 billion.

And Bernie Sanders is proposing a tax that would start at one per cent on a married couple’s wealth of at least $32 million, then gradually rise in seven steps to a top tax of eight per cent on net worth over $10 billion.

A writer for Slate magazine observed that if Sanders’s plan became reality, “I expect a lot of venture capital investors and tech types would start talking about moving to Canada.”

Economics professors Emmanuel Saez and Gabriel Zucman of the University of California, Berkeley, compared the Warren and Sanders wealth taxes and calculated how many people each would apply to, how much money they would raise and how quickly they would erode the wealth of billionaires over time.

Where the Parties Stand on Tax Reform — and What’s Needed

“A progressive wealth tax is the most direct policy tool to curb the growing concentration of wealth in the United States,” they wrote. “It can also restore tax progressivity at the very top of the wealth distribution and raise sorely needed tax revenue to fund the public good.”

They found “the Sanders wealth tax plan would entirely close the gap in wealth growth between billionaires and the average American family,” while the Warren plan wouldn’t go quite as far. “Which of the Warren and Sanders wealth tax — or none at all — is preferable is for the American people to decide.”

With the NDP wealth tax proposal in the mix ahead of the Oct. 21 election, Canadians have a similar decision to make.

The Tyee’s federal election coverage is made possible by readers who pitched in to our election reporting fund. Read more about how The Tyee developed our reader-powered election reporting plan and see all of our stories here.  [Tyee]

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