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Wealth tax would raise far more revenue than previously thought: CCPA

BY ALEX HEMINGWAY

Canadian Centre for Policy Alternatives

While the lives of millions of working people have been upended by the COVID-19 pandemic, the wealth of the richest few has continued to balloon in Canada. A wealth tax on the super rich is an important policy needed to address extreme inequality and help raise revenue for sustained, long-term increases in public investment in key areas after the pandemic.

Inequality has reached new heights in Canada in recent years. The richest one per cent now control 25 per cent of Canada’s wealth, according to a recent Parliamentary Budget Office (PBO) report. Research from the Canadian Centre for Policy Alternatives shows that the 87 richest families in the country each hold, on average, 4,448 times more wealth than the typical family. Together these 87 families hold more wealth than the bottom 12 million Canadians combined. 

Inequality is linked to worse performance on a wide range of health and social outcomes, as international epidemiological research shows. High levels of inequality also damage economic growth, as organizations like the IMF and OECD have begun to acknowledge in recent years.

Tackling inequality with a wealth tax on the super rich is hugely popular, backed by an overwhelming majority of Canadians across party lines in the most recent polling. This approach is also supported by a growing body of economic research and analysis. 

This paper provides a new estimate of the revenue potential of a wealth tax using up-to-date national accounts data and estimating tax avoidance and evasion based on the latest academic research. A one per cent tax on wealth over $20 million in Canada would generate about $10 billion in revenue in its first year, substantially more than the commonly cited estimate of $5.6 billion.

With a $10 billion boost to annual public revenues, Canada could lift hundreds of thousands of people out of poverty, implement long-term increases to funding for important social programs like child care, health care and seniors care, and help pay for more ambitious climate action. 

(See the CCPA’s Alternative Federal Budget 2019 and AFB Recovery Plan for program options and costing, as well as a range of other measures to raise additional revenue.)

A moderately more ambitious wealth tax could reduce inequality further and fund additional investments. 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.

Wealth taxes of these kinds, targeted to net worth over $20 million, would apply to only about 25,000 wealthy families, representing the richest 0.2% of the country. This tiny fraction of Canadians, the richest of the rich, together control $1.8 trillion of the country’s wealth.

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 $1 billion and 8% over $10 billion. 

A wealth tax is just one piece of the puzzle when it comes to tackling inequality and raising revenue for important public investments. It should be accompanied by a suite of other tax fairness policies, including ending the costly special treatment of capital gains income in the Canadian tax system and closing a range of other tax loopholes that benefit the affluent.

Updated wealth tax revenue estimates: the details

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.

First, the PBO’s July 2020 estimate of wealth tax revenues reflected a large drop in asset values early in the pandemic (a factor that the PBO acknowledges in its publication). Asset values have since then rapidly bounced back in Canada. In the current estimates, I use the most recent Statistics Canada data to update the PBO’s wealth data set. This is done using the methodology that the PBO provides in an earlier report for updating their wealth distribution data set.

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.

Second, and more significantly, the PBO assumed that 35% of the wealth tax base would be wiped out by “behavioural responses” such as tax avoidance and evasion. However, this estimated behavioural response rate is out of line with the economic research on wealth taxes.

Surveying academic studies of European wealth taxes, University of California, Berkeley economists Emmanuel Saez and Gabriel 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.

As Saez and Zucman emphasize, levels of tax avoidance and evasion are not laws of nature, but rather they are determined by policy choices. In its published estimates of wealth tax revenues, the PBO rightfully acknowledges a high level of uncertainty about behavioural responses. But much of this uncertainty is driven by policy choices that serve to protect the wealthy and can be changed. I say more on the proper design and enforcement of a wealth tax below.

Notably, Saez and Zucman applied their 16 per cent behavioural response estimate to the much more aggressive wealth tax proposals of Bernie Sanders and Elizabeth Warren, which use higher tax rates than have so far been proposed in Canada. We would expect a smaller behavioural response to a well-enforced wealth tax at the low one per cent rate proposed by the federal NDP.

An extensive new body of research produced by the UK Wealth Tax Commission, based out of the London School of Economics, reinforces this view. For a one per cent annual wealth tax in the United Kingdom, the Commission’s review of the evidence suggests a 7-17 per cent behavioural response rate.

Using behavioural responses that are in line with the scholarly economic research on wealth taxes yields substantially larger projected revenues than the earlier PBO estimate. 

For a small one per cent wealth tax, this paper uses the midpoint of the UK Wealth Tax Commission’s 7-17 per cent behavioural response range, applying a 12 per cent reduction in the wealth tax base. This yields net revenues of $10 billion in the first year of the tax. If we use behavioural response estimates across the full 7-17 per cent range, revenues vary from a high of $10.8 billion to a low of $9.2 billion.

I also include estimated revenues for a moderately more ambitious wealth tax with additional brackets (one per cent over $20 million, two per cent over $50 million and three per cent over $100 million), using Saez and Zucman’s higher 16% behavioural response to be more conservative in the estimate. This moderate wealth tax would raise an estimated $19.4 billion in net revenue in its first year (net of administration costs), though this estimate has a higher level of uncertainty.

 


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