BC Business
Alex Hemingway isn't the first person to call for a wealth tax on the rich. But he has a modest proposal that would let most affluent Canadians off the hook. Hemingway, an economist and public finance policy analyst with the B.C. office of the Canadian Centre for Policy Alternatives (CCPA), just published a paper laying out his argument. Drawing on the latest data and academic research, he shows that a 1-percent tax on Canadians with wealth over $20 million could generate some $10 billion in revenue during its first year. That's almost twice the oft-cited $5.6-billion estimate from the Parliamentary Budget Office (PBO)...
B.C. billionaire Jim Pattison is among the people who would pay more under a wealth tax proposed by the Canadian Centre for Policy Alternatives
Alex Hemingway isn’t the first person to call for a wealth tax on the rich. But he has a modest proposal that would let most affluent Canadians off the hook.
Hemingway, an economist and public finance policy analyst with the B.C. office of the Canadian Centre for Policy Alternatives (CCPA), just published a paper laying out his argument. Drawing on the latest data and academic research, he shows that a 1-percent tax on Canadians with wealth over $20 million could generate some $10 billion in revenue during its first year. That’s almost twice the oft-cited $5.6-billion estimate from the Parliamentary Budget Office (PBO).
Imposing a wealth tax on the super-rich is necessary to combat extreme inequality and to fund key public investments in the wake of COVID-19, the CCPA maintains. Apparently the public agrees that it’s time to make the wealthiest among us pay more. About eight in 10 Canadians support such a tax, according to a survey released last fall by Ottawa-based Abacus Data. Even Conservative voters are on board, with two-thirds backing the idea.
However, most politicians still don’t want to go there. “At a political level, there’s been a reluctance to tax the wealthy and high-income earners in this country going back several decades now,” Hemingway says. “I think we may see that change.”
If change really is coming, the question is how quickly, Hemingway asks. “That also depends on whether that public desire remains a passively held opinion or whether people get more active, and perhaps angry, about this issue,” he says. “Because we know that the very wealthy who this is going to affect are well organized and going to advocate effectively against a policy like this. So it would take some sort of counterforce to push things in the other direction.”
There’s no doubt that wealth disparity keeps growing in Canada. The richest 1 percent now control 25 percent of the nation’s wealth, a 2020 PBO report notes. The CCPA also points to its own 2018 study showing that, on average, Canada’s 87 richest families have 4,448 times more wealth than the typical family. Combined, their wealth outstrips that of the bottom 12 million Canadians.
Meanwhile, the very richest Canadians have grown even flusher during the pandemic. Two B.C. billionaires highlight that trend. Lululemon Athletica founder Chip Wilson has seen his net worth climb almost 60 percent since last April, from US$3.2 billion to $5.1 billion as of March 15, Forbes estimates. Over the same period, Jim Pattison‘s net worth more than doubled, swelling to $9.8 billion from $4.3 billion.
As Hemingway explains, his proposed wealth tax would only target a select group: about 25,000 Canadian families. It’s also much lower than the rates floated in the U.S. by senators Bernie Sanders and Elizabeth Warren, who want to tax wealth over $1 billion and $10 billion at 6 percent and 8 percent, respectively.
How did Hemingway arrive at his $10-billion revenue figure? Stressing that the PBO “does great work,” he says he updated its numbers and methodology in two ways.
First, because the PBO’s last revenue estimate is from July 2020—reflecting a temporary market plunge early in the pandemic—Hemingway boosted it to account for current asset values. Second, he incorporated recent academic studies showing that tax avoidance and evasion would only sap 7 to 17 percent of the wealth tax base—much less than the 35 percent projected by the PBO. “Their estimate is now out of line with the research on wealth taxes,” Hemingway says.
One common argument against a wealth tax is that it would prompt the ultra-rich to flee the country, taking their money with them. But it isn’t that simple, Hemingway warns. “All the modern wealth tax proposals—the ones coming out of the U.S., here, the U.K.—the key design feature is that it’s a tax on worldwide assets of these individuals,” he says. “So moving your money abroad won’t help.”
Hemingway also floats an exit tax: “You’re welcome to leave, but in recognition of the huge contribution of Canadian society to that fortune, a much higher rate is applied on an expatriation.” In the U.S., Sanders and Warren have proposed starting an exit tax at 40 percent. Wealth tax liability could also continue for several years after someone moves abroad, Britain’s Wealth Tax Commission has suggested.
To make a wealth tax work, Canada would need to take steps like boosting enforcement funding, hiking penalties for evasion and mandating stronger reporting requirements, Hemingway says. “In technical and economic terms, and in terms of the level of resources that it would require, that’s all very doable,” he adds. “The trickiest part would be the political will.”
However, Hemingway’s proposal would avoid widespread blowback because unlike older European wealth taxes, it skips the upper middle class, he says. “That’s a major political force that tended to negotiate and politically press for exceptions to certain types of assets.”
Hemingway wants to see other tax changes, too—the biggest one being the end of special treatment for capital gains. “Capital gains are taxed at half the rate of income from work, and that’s a hugely costly tax loophole or design feature,” he says. “And the benefits from that flow overwhelmingly to the top 10 percent of income earners.”
He points to work by University of Toronto economist Michael Smart, who estimates that equalizing treatment of capital gains and labour income in the tax system would increase federal and provincial tax revenue by $16 billion a year. “In some ways, they’re complementary,” Hemingway says of the wealth tax and capital gains proposals. “The wealth tax focuses in on the richest of the rich in a way that the capital-gains tax reform can’t.”
Besides providing new government revenue, a wealth tax on the very rich would help restore faith in the tax system and its fairness, Hemingway contends.
In a 2018 survey of some 1,700 Canada Revenue Agency tax professionals, conducted by the Professional Institute of the Public Service of Canada, nine out of 10 respondents said that it’s easier for corporations and wealthy people to evade and/or avoid tax responsibilities than for average Canadians. Roughly eight out of 10 agreed that corporations and rich Canadians disproportionately reap the benefits of tax credits, exemptions and loopholes.
The CRA has also faced criticism for shielding the identities of people convicted of offshore tax evasion—while publishing the names of small-business owners and other individuals who committed relatively minor tax offences.
“If you look at some of the psychological research on people’s willingness to contribute to a common fund, it’s really corroded when people are cheating in the game,” Hemingway says. “Particularly if they’re at the very wealthy end of the spectrum and there’s a sense that people aren’t paying their fair share, then it makes everyone else less willing to chip in and feel good about chipping in.”