The Distortion of Taxing Wealth

Taxing wealth has never been more popular. Nearly 75% of millionaires globally have shown an indication of support for higher taxes on wealth to decrease the cost of living and improve public services. This comes as a result of widespread support for putting a price on generational wealth.

Although this is immensely favorable, the Canadian government has shown no indication of introducing such a wealth tax or any associated legislation on the richest Canadians. Despite Prime Minister Justin Trudeau never coming out in clear support for a wealth tax implemented in the Canadian economy, reports from 2022 have suggested that his Cabinet has explored the possibility of a near $60 billion wealth tax.

Such a tax has been developed in several countries and communities around the globe, with generally similar results. With sky-high public support and multiple studies underway to analyze the effects of taxing wealth on the border economy, it seems logical to just implement one. Yet, as with most things in economics, the effects are not straightforward. So, how does a wealth tax really work? Why is it a good idea? And, perhaps more importantly, why is it not?

How a Wealth Tax Works

Simply put, a wealth tax is a tax based on the market value of the assets owned by the taxpayer or, essentially, a tax on net worth. Generally speaking, wealth taxes have been in place for generations; federal and provincial income taxes remain a stalwart of the government’s revenue-raising mechanisms. However, income taxes generally focus on taxing all incomes, no matter their size.

In contrast, the concept of a wealth tax that has been gaining traction in recent years is somewhat different. The modern day wealth tax attempts to tax the very wealthy, normally multi-millionaires and billionaires, who own fortunes in assets and holdings. But why is this potentially a promising tool?

Why is it a Good Idea?

First, let's look at the benefits of wealth taxes. One of the main reasons why the public advocates for a wealth tax is due to the problem of economic inequality. According to a report from Statistics Canada, the gap between the richest and poorest households rose to nearly 48% in late 2023. This comes as the cost of living in the world’s most developed economies continues to surge, with the prices of essential goods and services having seemingly sky-rocketed in recent years.

A wealth tax, by raising revenues for the central government, can help address these widespread issues. For instance, a wealth tax implemented immediately can raise more than $20 billion a year, approximately 4% of the current federal Canadian budget. Even with just a 1% wealth tax on households with wealth exceeding $20 million, the federal government could raise at least $5 billion annually. Moreover, further research by Oxfam International found that a global tax of up to 5% on the world’s richest multi-millionaires and billionaires could raise $1.7 trillion in just a year, which would be just enough to lift 2 billion people out of poverty.

The revenue raised from the world’s richest could not only promote fairness and socio-economic equality within the wider Canadian economy, but may also provide vital funds to spend on new programs, such as the widely touted Universal Pharma-Care Program. The revenue could also be used for green initiatives, in the form of research and development and transforming the Canadian energy sector.

Dr. Tenpao Lee argued that a wealth tax could incentivize multi millionaires and billionaires to reinvest their wealth into the national economy, instead of hoarding it. This could further fund nation-wide development and growth.

The Wealth Tax in Reality

While a wealth tax may seem like a fantastic theory on paper, a main reason why it fails to make sense in reality is the challenges associated with its administration and efficiency. Fundamentally, the wealth tax is based on calculating a person’s annual net worth, comprising everything they own. But this is no simple task; properly determining the net worth of wealthy individuals would require a massive increase in funding for tax collection agencies, such as the Internal Revenue Service (IRS) and the Canadian Revenue Agency (CRA).

Further accusations of the general inefficiency of tax agencies, like the IRS and CRA, have decreased faith over their potential handling of a possible wealth tax. Increased bureaucracy and regulations would also hurt the general efficacy of the Canadian tax system, an issue that has been demonstrated by other countries. For instance, when the Irish instituted a wealth tax in 1975 (but abolished it only 4 years later), they found that the administrative costs alone took up a staggering 25% of revenue raised. Generally, it can be expected that the revenues collected will fall short of revenues theorized.

Moreover, several forms of the wealth tax were used across 12 various countries in the Organization for Economic Co-operation and Development (OECD) during the early 1990s; now, that number has diminished to only 5. This was largely due to wealthy individuals leaving nations with high levels of wealth tax. While the departure of the richest from their nations may seem inconsequential at first, in reality, they also take their businesses, assets, and investments with them. This not only reduces and hampers general economic growth in nations, but also decreases the tax base for federal and regional governments.

For instance, nearly 42,000 millionaires left France between 2000 and 2012, driving away much of their assets and investments from their home nations. Another major reason why France partially repealed and reformed its own wealth tax is due to a widespread desire to encourage higher levels of foreign investment. The presence of a tax on wealth discourages foreign corporations and individuals to do business with that particular nation. There were also shared themes in other European nations which implemented the wealth tax — high administration costs results in the government, critically, just not raising that much revenue.

In general, it's clear that on paper, a wealth tax seems like a robust concept: by raising government revenues, Canada can alleviate the immense cost of living crisis. It’s also a wildly popular measure, one supported by a majority of Canadians. Nevertheless, history and past economic trends tell us the opposite. Pragmatically, the possible implementation of a wealth tax would be irresponsible, especially taking into account its high administrative costs and its detrimental effect on business and investment. Instead of resorting to likely reckless measures to increase the federal budget, the key might lie in developing a system that strikes a balance between higher revenues and strong economic growth.