How wealth tax could be a net negative for taxpayers overall
As the presidential campaign season gathers momentum south of the border, there has been a resurgence of debate surrounding an issue close to Canadians’ hearts. And no, it’s not about healthcare.
“A number of politicians in North America are warming to the idea of a wealth tax, wrote Gaël Campan, senior associate researcher at the Montreal Economic Institute, in a commentary published by the Financial Post.
Campan noted that in the US, Democratic contender Elizabeth Warren has proposed a tax that would be imposed starting at net asset levels of US$50 million. In Canada, the New Democratic Party is looking to introduce one on all net assets over $20 million, which it said would pay for numerous initiatives including a national monopoly pharmacare program.
Campan warned, however, that there’s a lesson to be learned from a similar experiment conducted in France. “It adopted the ‘Solidarity Wealth Tax’ in 1989, after having had a similar tax from 1982 to 1986,” he said. “This tax is not indexed to income but to the value of the assets that people have accumulated.”
That approach proved to be painful for French farmers on the Îsle de Ré off France’s west coast in 2005. After spending their whole lives tending to family farms, according to Campan, the farmers found themselves caught in a fiscal vise: soaring real estate prices meant they faced a massive wealth tax, but their income from farming was too modest for them to pay.
For Canada, he said, any wealth tax would go on top of other taxes that apply specifically or largely to the wealthy, such as the progressive income tax or capital gains tax. But the worst-case scenario wouldn’t end there.
“The most detrimental consequence for the Canadian economy, as it has been for France, would be the exodus of some of the targeted population,” he said. In France’s case, the wealth tax impacted a structurally older population on average (66 years old in France) compared with other taxes, but it still primarily drove away experienced entrepreneurs between the ages of 45 to 55 — the wealthiest segment — to more fiscally lenient neighbour countries like Luxembourg, Switzerland, and the U.K.
The convergent consensus across different independent studies and government reports, Campan said, is an estimated net departure rate of 510 households per year, making up some 0.2% of the one per cent. Extending the math, he determined that at 10 million euros per household yearly over a 33-year period, the upshot is some 170 billion euros of capital flight away from France, creating a missed opportunity for revenue collection as well as investments in France’s economy.
“The French studies conclude that the wealth tax is not fiscally efficient, with the value-added tax revenues foregone because of the exodus, far exceeding the wealth tax, not to mention other lost revenues,” Campan said, adding that the cost of collecting the wealth tax is twice as high as that for any other tax.
In Canada, he argued, a wealth tax would therefore end up reducing government revenues as streams from sales taxes, employer and employee contributions, corporate taxes, and other sources shrink. To make up for the shortfall, he inferred that new taxes would be levied — on the entire Canadian population “including those who can’t leave the country so easily.
“[T]he French experiment shows that a wealth tax is a demagogic ploy that ends up being counterproductive,” Campan said. “Moreover, once created, governments tend to be reluctant to rescind it because of the anticipated political costs.”