Higher taxes won’t solve our fiscal problems
Canadian politicians appear to be gearing up for an election campaign in which they will be asked how they would handle the myriad issues facing the country. Two of our most pressing concerns are Canada’s crippling debt and sky-high deficits. As the Parliamentary Budget Officer (PBO) recently noted, we are currently on track for 70 more years of deficits. How can today’s politicians avert such a debilitating scenario?
While some of our best minds have been pondering this matter, one discredited solution keeps rearing its head: the wealth tax. Two weeks ago, the PBO released yet another estimate of how much such a tax could levy. In this latest exercise, the focus was on Canadian families deemed to possess “extreme wealth,” that is, net wealth in excess of $10 million.
The declared objective of such a tax would be to “offset the costs of the pandemic and climate-change measures, or to pay for part of the government’s work on Indigenous reconciliation.” According to the most optimistic scenario, a one-time tax of three per cent on net wealth over $10 million and five per cent on net wealth over $20 million would raise roughly $82.5 billion over a five-year period. Given the thresholds, such a tax would affect as many as 87,000 Canadian families.
But it seems unlikely that this much money could be raised. In fact, the PBO’S most realistic scenario suggests that $60.7 billion could be collected from 68,000 families. How far would this take us towards paying for pandemic-related measures and reconciliation with First Nations? Not far at all. It amounts to only a fraction of the $300 billion in pandemic-related measures, and even less if we add in the $100 billion “stimulus package.”
Putting these figures in their broader context is even more sobering. Even if we add up all of the new revenue-increasing measures presented in the last federal budget — including best-case scenarios for the luxury car and airplane tax, the digital services tax, the tax on unproductive use of Canadian housing by foreign owners, the limitations on excessive interest deductions and the measures to prevent cross-border tax schemes — and then add in the PBO’S estimate for the maximum revenue that could be collected from the one-time wealth tax, the government’s spending would still burn through a full fiscal year of such revenue in about 16 days. The taxes in question would provide $18 billion in revenue per year. But the government plans on spending more than $1 billon per day.
Those who support the idea of a one-time wealth tax also believe such a measure could partly address concerns regarding “rising extreme wealth inequality and generational fairness.” But much of what they propose to spend that money on — such as climate change and the cost of past COVID measures — would do little to improve living standards at the bottom of the income distribution or make it easier for people to climb up the income ladder. It would be akin to losing weight by lopping off body parts:it achieves a numerical objective but is counterproductive for the underlying goal.
While it might be tempting to imagine that large accumulations of personal wealth simply sit in a hidden vault, that image is entirely inaccurate. In fact, the savings of the rich are very active and ultimately get reinvested in the economy through new business ventures or in the modernization of factories. With a new wealth tax, however, Canadian-owned businesses may be pressured to sell to foreign investors in order to generate the liquidity needed to pay the tax. The Canadian economy should not have to shoulder the burden of losing out on the investments of its wealthiest families, which fuel long-term projects, risk-taking entrepreneurship, job creation, and the development of unexploited potential.
Overspending has become the norm in Ottawa. But it is not too late to turn a corner. Instead of grasping at new ways of increasing revenues, the government should invest its energy and creativity in finding ways to control spending. Future generations of Canadians will be grateful if today’s generation goes back to requiring politicians to be fiscally responsible.