Since the last federal election campaign, the NDP has been continually beating the drum for a wealth tax. The party’s latest push comes in its supplementary report to the 2021 budget consultations. Their case for the tax, however, is based on significant economic errors.
First, the NDP claims that a wealth tax has been recommended by the Organisation for Economic Co-operation and Development (OECD), but their report, despite containing 27 footnotes, does not provide a source for this claim. The OECD did publish an analysis on wealth taxes in 2018 but, to quote from its news release, while it examined the case for and against wealth taxes, it “does not call for their introduction.”
Second, the NDP cites an estimate from the Parliamentary Budget Office (PBO) to support its claim that “by introducing a one per cent tax on wealth over $20 million, we could count on revenues of $5.6 billion” in 2021. But the government cannot really “count on” that level of revenue, as the PBO admits that its estimate is based on assumptions around which there are high degrees of uncertainty.
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Importantly, the $5.6-billion figure does not account for the behavioural effect of wealth taxes on income tax revenues. That is, when people know that their wealth will be taxed, their incentive to accumulate wealth is reduced, which means they will tend to reduce their work effort, earn less income, and pay less federal and provincial income tax.
Because it ignores this negative effect on income tax revenues, the $5.6-billion revenue estimate is based on fantasy. The net revenues to governments as a result of introducing a wealth tax, properly calculated, could well be $0, or even negative; in other words, it’s very possible that the lost income taxes would more than offset the wealth tax revenues.
Third, the NDP’s case for a wealth tax relies on deceptive advertising by suggesting that only “the rich” will pay for the tax. This involves confusion between the statutory incidence of a tax (who writes the cheque to the government) and the economic incidence of the tax (who actually bears the economic burden). While a wealth tax does fall on the better-off, its economic incidence falls on everyone.
This is because the assets of wealthy families do not consist of suitcases full of cash sitting idle in their homes; rather, the vast majority of their wealth is invested – in factories, buildings, technological research projects, machinery, equipment, and businesses of all kinds.
These investments provide productive jobs to workers and produce goods and services that improve the lives of consumers. Thus, much of the economic incidence of a wealth tax, by disincentivizing productive business investment, falls on workers in the form of lower wages and fewer job opportunities and on consumers in the form of higher prices and a reduced availability of goods and services.
At bottom, as Montreal Economic Institute (MEI) economist Gaël Campan concluded in a study on wealth taxes last year, “the idea that we can easily tax rich people with impunity is flawed.” The gains to government coffers from a wealth tax, if any, would be swamped by the economic burdens imposed on the private economy and borne by all members of society.
When it comes to wealth taxes, therefore, the sensible course of action is to ignore the NDP, whose case for the tax is full of holes.
Matthew Lau is a fellow at the MEI.