Wealth tax could give bigger-than-expected boost to Canada's coffers

Policy think tank argues widely cited estimate of resulting revenue grossly overestimates impact of 'behavioural responses'

Wealth tax could give bigger-than-expected boost to Canada's coffers

As Canadian policymakers continue to focus on supporting the pandemic-hit economy, the Canadian Centre for Policy Alternatives (CCPA) has published a new report revisiting the value of a wealth tax in funding such government efforts.

According to the report written by Alex Hemingway, economist and public finance policy analyst at the CCPA, implementing a tax of 1% on wealth exceeding $20 million in Canada would yield roughly $10 billion in its first year, nearly twice the commonly cited estimate of $5.6 billion.

“This paper’s updated estimates of wealth tax revenue corrects for two limitations in the most recent and commonly cited wealth tax revenue estimate from the Parliamentary Budget Office (PBO) in July 2020, while maintaining the core of PBO’s methodology,” Hemingway said.

While the PBO’s estimate of wealth tax revenues reflected the large drop in asset values early in the pandemic, he argued that asset values in Canada have since rapidly recovered. To correct for this, he updated the PBO’s wealth data set with the most recent data from Statistics Canada, using a methodology that the PBO had previously published.

“When the latest aggregate wealth data is used, this adds $800 million to the projected net revenue for a 1% wealth tax compared to the earlier PBO estimate of $5.6 billion,” Hemingway said.

More significantly, he questioned the PBO’s assumption that “behavioural responses” such as tax avoidance and evasion would erase 35% of the wealth tax base, arguing that it falls out of line with the latest economic research on wealth taxes.

In a survey of academic studies focusing on European wealth taxes, he said economists from the University of California, Berkeley determined that such behavioural responses amounted to a much lighter impact of 16%. That figure, they suggested, was an “upper bound” as European policies could have easily been better designed to mitigate such responses.

Hemingway also cited new research from the UK Wealth Tax Commission, based out of the London School of Economics, which concluded that behavioural responses to a 1% annual wealth tax in the UK would erode the tax base by 7-17%. Using the midpoint of that range, 12%, the CCPA paper determined that a 1% wealth tax in Canada would yield net revenues of $10 billion in its first year.

“If we use behavioural response estimates across the full 7-17% range, revenues vary from a high of $10.8 billion to a low of $9.2 billion,” Hemingway said.

To prevent potential tax arbitrage from shifting wealth between asset classes, he recommended that a modern wealth tax be applied equally across all types of assets. To protect the upper middle class, whose primary residences may make up a disproportionately substantial share of their wealth, he suggested that the wealth tax be focused on the “super rich,” with the “merely rich” being taxed by other means.

“A moderately more ambitious wealth tax could reduce inequality further and fund additional investments,” he said. “For example, a wealth tax with rates of 1% on net worth over $20 million, 2% over $50 million and 3% over $100 million could raise nearly $20 billion in its first year.”

Such wealth tax rates, Hemingway added, are much more reasonable compared to others being proposed. Pointing to the U.S. as an example, he noted that plans championed by Elizabeth Warren and Bernie Sanders would have rates as high as 6% applied on wealth over $1 billion

Notably, these wealth tax rates do not even approach the much higher rates called for by Bernie Sanders and Elizabeth Warren in the United States. Their more aggressive plans would apply rates as high as 6% on wealth over US$1 billion, and 8% for wealth exceeding US$10 billion.


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