Robust wealth tax could raise $363B over 10 years
Amid a rise in extreme inequality, the idea of an annual tax on the wealth of the super-rich has risen to prominence in recent years in many countries. New analysis shows that a robust wealth tax in Canada—one that goes further than those currently on the table in the federal election—could raise well over a quarter of a trillion dollars in revenue (cumulatively) during the next decade.
During the pandemic, billionaire wealth skyrocketed globally and in Canada, major gaps in social investment were exposed and large emergency expenditures provided a critical lifeline, raising the question of how concentrated wealth might be tapped to raise more public revenue going forward.
Recent polling suggests that a wealth tax is a striking point of unity among the Canadian public, with the policy garnering 89% support overall, including 83% of Conservative voters. It’s equally striking that a near-consensus among the public has translated so unevenly to the party platforms.
The federal NDP is proposing a 1% annual tax on net wealth over $10 million in its 2021 election platform, though this is more modest than wealth taxes proposed by Elizabeth Warren and Bernie Sanders in the United States, who would apply rates on the super rich rising as high as 6% and 8%, respectively. The Green Party is backing a smaller wealth tax in its newly released platform, which would apply the 1% rate to net family wealth over $20 million. The Liberals, Conservatives and Bloc Quebecois opposed a parliamentary motion for a wealth tax last year, though the Bloc’s election platform now backs a one-time wealth tax but not an ongoing one.
The focus of this analysis is on wealth taxes specifically, but it should be noted that the NDP, Greens, Bloc and Liberals each propose additional taxes on the well-to-do, though none of these other policies would raise as much revenue as a wealth tax, nor do they target wealth directly. A suite of policies is needed to tackle extreme inequality and raise public revenue, so adding more tools to the toolbox is welcome. Prior to the pandemic, wealth inequality in Canada had already reached new extremes.
The richest 1% controlled 26% of Canada’s wealth in 2016, according to a Parliamentary Budget Office (PBO) report. Recent academic research suggests that figure may be even higher at 29% of wealth.
Speaking of the 1%, a household in the top 1% of wealth holders in Canada is not necessarily rich enough to be subject to the proposed wealth taxes. A wealth tax over $10 million would apply to only the richest 0.5%, representing about 75,000 families in total. In other words, these wealth tax proposals apply only to the richest of the rich, but they can still raise significant revenues.
Taxing extreme wealth: room to think bigger
How much revenue could be raised by a more robust annual wealth tax that aims higher than the 1% rate currently on the table in the federal election, moving closer to some of the more ambitious policies being proposed by some legislators in the United States?
To answer this question, I modelled a moderate wealth tax with three brackets: 1% on net wealth over $10 million; 2% over $50 million; and 3% over $100 million.
This wealth tax would go further than the NDP’s proposal (the strongest in the election platforms), which applies a single rate of 1% on wealth over $10 million. But it remains much lower than the rates of up to 6% and 8% in Elizabeth Warren and Bernie Sanders’ recent policy proposals and draft legislation.
Indeed, more aggressive wealth tax rates like those in the Sanders and Warren proposals should be part of Canada’s debate, too. These more aggressive rates are needed to make a real dent in enormous fortunes and begin to truly deconcentrate extreme wealth rather than simply slow its growth as lower rates would do. Still, for a small country like Canada, acting as a first mover by implementing a wealth tax on the super rich, imposing more moderate rates rising to 3% is a sensible place to start.
My revenue projection uses the High Net Worth Family Database from the Parliamentary Budget Office (PBO) and is informed by the latest research from academic economists specializing in wealth taxes.1
More aggressive rates are needed to make a real dent in enormous fortunes and begin to truly deconcentrate extreme wealth.
To put this in perspective, $28 billion is approximately what it would cost to pay for universal pharmacare, $10-a-day child care and eliminating tuition fees for post-secondary education combined, which would each have knock-on benefits for the economy and household budgets.
The NDP’s modest 1% tax on wealth over $10 million would raise less revenue, but still a very substantial amount. If the tax were in place today, it would raise $17 billion in its first year, rising to $26 billion in its tenth year, with a cumulative total of $218 billion over the 10-year budgetary window. The Green Party’s smaller wealth tax would raise $12 billion in its first year and $157 billion over the 10-year window.
Allowing tax avoidance and evasion: a political choice
By relying on more up-to-date research from academic economists specializing in wealth taxation, I arrive at a higher revenue estimate than the PBO’s estimate for year one of the NDP proposal of $10.9 billion. The PBO assumes a very high level of tax avoidance and evasion that is not consistent with the most recent academic research on wealth taxes. This includes key work by economists Gabriel Zucman and Emmanuel Saez, who analyzed the revenue potential of Warren and Sanders’ wealth taxes, and the UK Wealth Tax Commission based out of the London School of Economics.3
Would Canada’s super rich flee the country to avoid a wealth tax? Some may, but a well-designed wealth tax will not allow them to dodge their tax obligations in this way. As in the Warren and Sanders wealth tax proposals, a steep “exit tax” should be applied on expatriation, in recognition of Canadian society’s contributions to these fortunes. Exit tax rates are set at 40% in the Warren and Sanders plans and could be set even higher. The UK Wealth Tax Commission suggests a similar policy option in which wealth tax obligations continue to apply to the super rich for a set number of years after emigration.
As Saez and Zucman emphasize, levels of tax avoidance and evasion are policy choices. Ramping up tax enforcement and cracking down on avoidance and evasion is not only possible, but also critical to making a wealth tax work. The good news is that we already largely know how to do it. Would Canada’s super rich flee the country to avoid a wealth tax? A well-designed wealth tax will not allow them to dodge their tax obligations.
Analysis from the PBO also reinforces the effectiveness of stepping up enforcement efforts in the existing tax system. It estimates that recent federal investments in business tax enforcement alone (which are modest and should go further) have brought in nearly six dollars for each dollar spent on enforcement, plus a further boon to provincial revenues. New election platform analyses from the PBO project that further enforcement against tax evasion and avoidance would generate multi-billion dollar payoffs in revenue, at a similar rate of return, something multiple party platforms tap into as a revenue source.
Taking back wealth to fund the public good
There is a huge backlog of badly needed public investments in this country, which can help us tackle major challenges: unaffordable child care, climate crisis, scarce and unaffordable housing, millions living on incomes below the poverty line, and major deficiencies in seniors’ care, among many others.
Canada is more than rich enough to meet these challenges. But we need to harness our national wealth, which all of us have a hand in creating, and direct more of it into investments for the common good. A wealth tax on the super rich could play a major role in financing sustained social and environmental investments after the pandemic, which would enhance economic growth and strengthen the foundations of a healthy economy and society for the long term.
Of course, the wealthy in this country are influential and will fight to block such a policy from being enacted. They may succeed unless—building on extraordinary levels of public support and the lessons of social movement history—people organize from below to take on the power of organized money.
Notes
1. I use the latest Statistics Canada population data and the National Balance Sheet Accounts data (Q2 2021) to bring PBO’s High-net-worth Family Database (HFD) up to date. See page nine of PBO’s June 2020 report for a full description of how they describe updating their 2016 HFD data set using these same population and NBSA data series from Statistics Canada.
2. Note that these are net revenue projections, with a generous 2% of gross revenues already put aside for added investment in enforcement and administration, amounting to half a billion dollars in the first year. To estimate growth in the wealth tax base in future years, I follow the approach used by University of California, Berkeley, economists Emmanuel Saez and Gabriel Zucman in their revenue estimates for Elizabeth Warren’s most recent wealth tax proposal. Specifically, I assume that the wealth tax base (household net worth) will increase at the same rate as nominal GDP growth, even though net worth has actually risen more rapidly than nominal GDP growth over the past three decades. I use the long-term nominal GDP growth rate of 3.8% from the projections in the PBO’s Election Proposal Costing Baseline to grow the wealth tax base each year. To be conservative, however, I ignore the much higher rates of GDP growth that the PBO projects in the next two years (13.4% and 7.1%) and only apply the lower long-term growth rate of 3.8%, even to these next two years of expected economic recovery. Finally, given that household net worth actually grew at an average nominal rate of about 6.8% over the past three decades, it is reasonable to project continued nominal growth in the wealth tax base of at least 3.8%, even after applying rates as high as a 3% annual wealth tax to net worth over $100 million each year.
3. The PBO assumes that 35% of the wealth tax base would be wiped out by “behavioural responses” such as tax avoidance and evasion. Surveying academic studies of European wealth taxes, Saez and Zucman estimate a substantially lower average behavioural response of 16%. Furthermore, they suggest that this figure should be understood as an “upper bound.” That is, behavioural responses to these European wealth taxes were higher than they needed to be as a result of policy design flaws that can be readily avoided (see my previous analysis for further discussion). My estimates of revenue from a moderate wealth tax (with rates rising to 3% over $100 million) therefore apply the same 16% behavioural response rate as Saez and Zucman do in their projections for the much more aggressive wealth tax proposals of Bernie Sanders and Elizabeth Warren.
With respect to a well-enforced wealth tax at the 1% rate proposed by the federal NDP, we would expect a smaller behavioural response. An extensive body of new research produced by the UK Wealth Tax Commission, based out of the London School of Economics, reinforces this view. For a 1% annual wealth tax in the United Kingdom, the Commission’s review of the evidence suggests a 7-17% behavioural response rate. Therefore, for a smaller 1% wealth tax, in this analysis I use the midpoint of the UK Wealth Tax Commission’s 7-17% behavioural response range, applying a 12% reduction in the wealth tax base.
Topics: COVID-19, Democracy, Economy, Poverty, inequality & welfare, Taxes
