Wealth taxes would discourage entrepreneurship when we need it most and that would make us all collectively less wealthy

Despite their many flaws, wealth taxes remain on the political agenda. Democratic primary candidates Elizabeth Warren and Bernie Sanders campaigned aggressively for them. In this country, the NDP and Greens imported versions for their October 2019 federal election platforms, with each proposing annual taxes equal to one per cent of family wealth exceeding $20 million. And now with government spending exploding because of the pandemic, some are suggesting wealth taxes for revenue generation. Our governments should resist that temptation.
The difficulties with wealth taxation are well known. How do you measure a family’s wealth if it’s made up of hard-to-value property such as real estate or a private business? How do people pay when they hold their wealth in illiquid assets? What about the wealth tax’s pernicious incentive effects on the economy, including the disincentive it creates to generate and accumulate wealth? People respond to wealth taxes with avoidance, including capital flight. Unlike broad-based taxes on income or consumption, wealth taxes are paid by only a relatively few taxpayers. They don’t generate reliably sustainable revenue.
So why do many on the Canadian left still support wealth taxes? Most justify them as a way to reduce inequalities and fund redistributive social programs.
But inequality is a tricky subject. Academics differ on what matters most: inequality of income, wealth, consumption power, opportunity or outcome? They also debate how to measure inequality and even whether inequality (as distinct from poverty) is necessarily a problem for society.
Canadians generally do not tolerate inequality of life outcomes that arise from crime, corruption, discrimination or inequality of opportunity. Quite rightly, we target this sort of “bad” inequality with measures directed at removing or offsetting the underlying unfairness. Our efforts, though they can certainly be improved, reflect our aspirations for a compassionate society without poverty or unfair inequality.
But some inequality is a consequence of people’s success or failure in our competitive market-based economy. Differential rewards, sometimes handsome ones, encourage risk-taking and hard work. Inequalities resulting from fair competition are morally tolerable and promote the dynamism of our economy. They signal to all Canadians that hard work, sensible risk-taking, investments in their own human capital and perhaps some good luck can pay off.
Some critics point to an erosion of social cohesion if people perceive that inherited wealth perpetuates “unearned” inequality. The Forbes billionaires list does indeed include several Canadians who inherited their wealth though they are now entrepreneurs in their own right. But most of the Canadians on the Forbes list were themselves founders or investors in successful business ventures. Though Canada no longer has inheritance or wealth transfer taxes, we do tax accrued capital gains at death and this limits the retention of inherited wealth over multiple generations.
So how much inequality do we have in Canada, and is it really a problem requiring correction by wealth taxes? Despite its deficiencies, the most commonly used yardstick of inequality is the Gini coefficient of income dispersion. Perfect equality yields a Gini score of zero, absolute inequality a score of one. The OECD provides comparative Gini scores for both pre-tax market income and disposable income (i.e., after taxes and government transfers).
Canada’s Gini score for disposable income is 0.31 and has remained essentially stable since 2004, the year the OECD data set started, when it was 0.32. Our Gini score for pre-tax income is 0.44, which has also remained stable over this period. This difference illustrates how effectively Canada’s high income taxes and social transfers reduce Canadian income inequality. For its part, the stability of our Gini scores contradicts the popular impression that Canadian inequality is getting worse.
For context, the disposable-income Gini scores for the United States and United Kingdom are 0.39 and 0.36, respectively, reflecting higher inequality in those countries. Some countries’ social policies lead to lower inequality Gini scores, such as France (0.29), Sweden (0.28) and Belgium, Denmark and Norway (all at 0.26). The high U.S. Gini score is a consequence of its being one of the most dynamic free enterprise economies in the world, which may also explain why the U.S. generates so many wealth tax proposals.
But we should not reflexively apply the same U.S. policy rationale for wealth taxes in Canada. Our Gini score is much lower and more stable, reflecting mitigated inequality from our more steeply progressive personal income taxes and more generous government transfers. We already have government-funded universal health care, a robust public-school system and widely accessible universities and colleges promoting equality of opportunity. And unlike the U.S., we have campaign finance restrictions to lessen the political influence of wealthy Canadians. In our context, wealth taxes are a solution looking for a problem.
If we decide to raise taxes to pay for the pandemic fallout, we should turn first to more efficient and broader-based consumption taxes. Absent a strong need for “inequality mitigation,” wealth taxes would discourage entrepreneurship when we need it most and that would make us all collectively less wealthy.
Financial Post
Geoffrey S. Turner is a tax lawyer at Davies Ward Phillips & Vineberg LLP and adjunct professor of business taxation at Osgoode Hall Law School.