Amid renewed calls for measure, policy expert points to pitfalls and inefficiencies revealed by foreign experiences
Between the direct and indirect economic effects of the COVID-19 pandemic and the exploding national debt due to aggressive government aid programs, it’s no wonder that the debate on taxing the rich has seen a revival. But according to the Montreal Economic Institute, such a measure would have consequences for all taxpayers.
“The current economic crisis is leading some people to call once again for the introduction of a wealth tax in Canada,” said MEI Senior Economist Gaël Campan. “Yet this is an old idea that has been discredited each time it has been tried abroad.”
In a new economic note titled Wealth Taxes End Up Hurting Main Street, Campan argued that politicians repeatedly expect larger amounts of revenue than what actually ends up getting collected.
Wealth taxes, he said, exert a heavier impact on the rich than most would assume. Such taxes would be applied to all assets, liquid or illiquid, which means even a low tax rate of 3% on large-value assets can be devastating on affluent households whose incomes are far smaller than the fair-market value of their wealth would suggest. To avoid this, he said wealthy households consistently look for – and are able to find – tax-planning strategies that shield their assets, with some going as far as leaving their home country.
“In France, this tax led to an average annual exodus of 510 households for 33 years, depriving the country of up to €200 billion in 2015 inflation-adjusted euros,” Campan said. Once the rich have insulated themselves, he said, less well-off taxpayers are left exposed and having to pay more for the government to make up its shortfall.
Campan also argued that a larger wealth tax will reshape their relative inclination to consume or donate rather than save. Increased taxation of invested savings, he argued, will therefore hurt the ability of new ventures to raise capital as wealthy investors favour more mature, income-generating assets.
“Wealth taxes are also harder to collect than other taxes,” he said, citing how Austria acknowledged the “high administrative cost” of data collection when it repealed its wealth tax in 1994. Such costs can increase significantly due to challenges in valuation of certain assets, such as shares in non-listed businesses or esoteric assets like art, jewellery, or rare furniture. Aside from that, he said governments could face even higher bureaucratic costs as retired and educated wealthy households hire lawyers, accountants, and experts to fight against what they see as arbitrary claims from tax collectors.
“And that's in addition to the fact that in a country like Canada, where there is substantial social mobility, people who are among the least well-off today could very well end up being affected by a wealth tax,” Campan said.