Canada needs to get serious about taxing the rich to reverse the rise of extreme inequality, blunt the concentration of economic and political power, and create ongoing streams of revenue to fund badly-needed public services.
A wealth tax is one important tool to accomplish these ends, but it will require breaking with a status quo that narrowly serves the interests of Bay Street (Canada’s equivalent of Wall Street) and the wealthy few.
We Cannot Afford the Rich
Canada’s richest 1 percent control 26 percent of our wealth. Eighty-seven of the country’s richest families together hold more wealth than the bottom twelve million Canadians combined. Each of these richest families hold, on average, 4,448 times the wealth of the typical family.
The dynamics of extreme inequality have continued to unfold during the pandemic. The wealth of Canada’s richest twenty billionaires has ballooned by more than $37 billion since the March 2020 lockdown came into effect, while millions of workers lost their livelihoods.
This comes as no surprise since leading Bay Street figure Bill Morneau has been serving as minister of finance for most of the past five years. The interests of economic elites have long been well-represented in Ottawa.
Yet it’s increasingly clear to Canadians that no individual or corporation becomes wealthy without an enormous collective effort, both by workers and through public investments in social and physical infrastructure. The massive wealth of this country rightfully belongs to all of us.
If we can harness more of this wealth together, Canada is rich enough to implement universal public childcare and pharmaceutical drug coverage, transform our broken seniors’ care system, build affordable housing for all, and transform our energy system in the face of a worsening climate crisis.
Indefensible and Inefficient
Extreme economic inequality is not only unjust in itself, but research increasingly shows that it directly worsens health and social outcomes and puts a drag on economic growth. A growing body of economic research affirms the need for taxing the wealthy.
French economist Thomas Piketty famously brought wealth taxes to prominence in his book Capital in the Twenty-First Century. Piketty painstakingly shows how the profits from capital ownership are outstripping economic growth, increasing the concentration of wealth and power among the superrich. Those who gain their income from wealth are amassing more and more compared to those who earn their income from work.
University of California Berkeley economists Emmanuel Saez and Gabriel Zucman have since developed a detailed research case for implementing wealth taxes. Wealth tax policy proposals have proliferated in the United States, Canada, Spain and at an EU-wide level in recent months.
The idea of a wealth tax enjoys huge public support in Canada, at levels rarely seen on any public policy issue. A recent Abacus poll shows 75 percent support and only 14 percent opposition to a wealth tax — including even 69 percent support among Conservative Party voters. This is consistent with pre-pandemic Canadian polling on the issue, as well as opinion research in the United States and elsewhere.
A proposal put forward by the federal New Democratic Party (NDP) in last year’s Canadian election would apply an annual tax of 1 percent on net wealth over $20 million (meaning the first $20 million of any household’s wealth is exempt).
This would be a good start, though limiting the wealth tax rate to 1 percent is an unnecessarily timid approach. Recall that the wealth tax proposal from Bernie Sanders started at 2 percent (at a slightly higher threshold of $32 million) and rose to 8 percent on wealth over $10 billion.
The Canadian Parliamentary Budget Office (PBO) estimated that the NDP proposal would raise $5.6 billion in the first full fiscal year, eventually rising to $9.5 billion per year. This alone would be a good enough reason for pursuing a policy of this kind, but the PBO’s revenue estimate is highly conservative, making assumptions that are out of line with the economic research on the topic.
Specifically, the PBO assumes that the rich will successfully hide more than twice as much of their fortunes from a wealth tax as leading economists estimate. While PBO pegs the avoidance rate at 35 percent, Zucman and Saez estimate this rate at 16 percent, based on evidence from European wealth taxes (and they characterize this as an upper estimate for avoidance, in view of the design flaws in these earlier taxes).
Escape-Proofing a Wealth Tax
The Panama Papers confirmed what everyone already knew about the world’s rich: that through legal intricacies and obfuscations, they park their assets in favorable tax and regulatory jurisdictions. For this reason, there is common skepticism about the possibility of implementing a wealth tax that could function effectively. Zucman and Saez, however, make a strong case that it can be done.
By design, a modern wealth tax would apply to the worldwide assets of any Canadian citizen or resident above the established threshold (in a similar fashion to the US requirement for its citizens to pay taxes even if they live and work abroad, with a credit applied for any foreign tax paid). This means shifting funds to low-tax jurisdictions won’t get you off the hook — at least in terms of legal obligations.
Some suggest that the wealthy will go as far as renouncing their citizenship, but that won’t help them either. A much steeper “exit tax” would be applied in that circumstance, in recognition of Canadian society’s contributions to these fortunes.
Exit tax rates are set at a rate of 40 percent in the Sanders and Elizabeth Warren wealth-tax plans and could be set even higher if needed. Besides, in an uncertain and unstable world, many of the superrich may think twice before giving up their Canadian passport.
The biggest concern is that the wealthy will engage in blatantly illegal tax evasion, flouting the law to hide or misreport their wealth in tax havens. That means ramping up tax enforcement and cracking down on tax avoidance and evasion is critical if we are going to make a wealth tax work.
The good news is that, as Zucman and Saez emphasize, we know a great deal already about how to crack down on tax havens. Key elements would include targeting the financial services industry that helps enable avoidance and evasion schemes, stronger data-transparency requirements for any banks doing business with Canada, and greater resources and penalties for tax enforcement. What’s needed is political will.
Taking on the Billionaire Class
Significant new tax enforcement efforts should be undertaken with or without a wealth tax. The PBO recently estimated that investments in business tax enforcement alone could raise billions in additional revenue for Canada, with a fiscal impact of nearly six dollars for each dollar spent on enforcement, plus a further boon to provincial revenues. The fact that much stronger enforcement efforts haven’t been undertaken is a testament to the raw power of corporations and the wealthy over our politics.
One other important aspect of a modern wealth tax is that it must be applied comprehensively to all types of assets, so there is no incentive to shift wealth between asset classes to avoid it. This is a lesson learned from some older European wealth taxes, which often exempted certain assets like primary residences.
This was typically done with the intention of protecting the middle class because these taxes applied at much lower wealth thresholds. A wealth tax focused on the superrich avoids these problems by exempting the middle class altogether, eliminating the rationale to exclude certain assets.
Still, a wealth tax is just one of the tools needed to reduce inequality, break up concentrations of economic power, expand public services, and help pay for the costs of the COVID-19 crisis. In terms of tax policy alone, a broader panoply of measures is needed: equalizing the treatment of income from wealth (capital gains) and income from work, closing a proliferation of tax loopholes that benefit the affluent, corporate tax reform, an excess profits tax, and substantially raising the top marginal income tax rate.
Beyond taxation, a whole range of other actions are necessary to take on extreme wealth and economic power in Canada, including the strengthening workers’ rights and new models of public and worker ownership. But a wealth tax on the superrich would represent a real step forward.
Canadians are frequently told “we’re all in this together” when it comes to the COVID-19 crisis. There is some truth to this as ultimately anyone can get sick. But the recent explosion in billionaires’ wealth shows that the crisis has only magnified the ways in which a wealthy minority live in an altogether different world from the rest of us.
It’s no surprise that policies like a wealth tax enjoy such huge levels of public support, despite the continual efforts of corporations, pundit-class functionaries, and the wealthy elite to convince everyone that it would be disastrous or impossible.
The economic and social arrangements that produce these outcomes are not laws of nature; they are the predictable results of policy choices. We have the power to make different choices, if people get organized from below and demand it. There’s rarely been a more important time to exercise that power.