Watch out for red flags on wealth tax, experts warn

Calls to address inequality are rising, but policy-makers may be better off not following that path

Watch out for red flags on wealth tax, experts warn

As candidates for next year’s US presidential elections prepare to launch their campaigns in earnest, the debate on whether the rich are paying their fair share of taxes has been reignited. The idea of a wealth tax is gaining support among democratic candidates, as well as a cohort of the world’s richest individuals.

The idea also holds some appeal in the Canadian context, with proponents arguing that more must be done to address rising income and wealth inequality. But according to a new commentary published by the CD Howe Institute, adopting a wealth tax is not the most ideal solution.

“Our argument is that wealth taxes add relatively little to the taxes on capital and capital income that are already in place,” wrote Robin Boadway, Emeritus Professor of Economics at Queen’s University, and Pierre Pestieau, Professor Emeritus at Université de Liège.

In their commentary titled Over the Top: Why an Annual Wealth Tax for Canada is Unnecessary, the two noted that interest in wealth taxation has risen in response to rising wealth concentration and income inequality across most OECD countries. A tendency for productivity growth rates to lag rates of return on capital, coupled with the disproportionate accrual of capital income to more affluent persons, has led to a growth in income and wealth gaps.

The two also pointed to research indicating a rising proportion of savings devoted to inheritances rather than life-cycle smoothing, which they say “reduces intergenerational mobility and equality of opportunity for those unable to inherit such great wealth.” With countries’ income tax rate structures become flatter and capital income tax rates dropping in the name of competitiveness, they added, after-tax income inequality has grown even more rapidly than pre-tax income inequality.

However, they said that “wealth taxes add relatively little to the taxes on capital and capital income that are already in place.” An annual wealth tax, they argued, would add an extra layer of asset taxation to the existing patchwork of capital income, labour income, consumption, and property taxes in Canada.

Alluding to substantial administrative challenges in measuring, collecting, and coverage for annual wealth taxes, Boadway and Pestieau noted that taxing wealth and taxing capital income are effectively identical under certain conditions. In many cases, this is far from true: the two taxes may not be computed from the same base (exemptions on the two taxes vary among assets), market values and assessed values of assets may differ, the tax rates may differ in level and progressivity, and so on. Overall, however, the duo found that the case for a wealth tax to complement capital-income taxation is limited.

“At the same time, there are significant drawbacks to wealth taxation relative to capital income taxation,” they continued. A tax on capital income, they noted, incorporates windfall gains on the tax base, while a wealth tax does not. Similarly, capital income taxation applies to returns to risk, whereas a wealth tax will not.

“The upshot of this discussion is that a wealth tax is to a large extent an imperfect substitute for a tax on capital income,” the authors said, adding that capital income taxation’s full advantages can only be realized through optimal design.


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