Death and taxes: the fundamental unfairness of taxing estates

We already have too many taxes in Canada. And they tend to be unfair, inefficient and oppressive. We don't need another

Ian MadsenA long-dead and largely unlamented tax has recently been rediscovered and embraced by certain people: the death tax, or estate tax.

But inheritance taxes were abolished in Canada in 1971 by the Liberal government when a capital gains tax was introduced.

In Canada, estates are already taxed on the difference between the market value of the securities or other assets at the time of death and what they cost.

Fans of restoring the death tax ignore the existence of these capital gains taxes, and also the taxes that were already paid on the income that went to invest in or grow the assets (say a business or farm) initially.

There’s only one real justification for taxes: to finance government. All functions of government require funding of some sort.

So how do you provide that funding in a way that’s perceived to be fair and efficient, and not oppressive?

The current approach is to use a wide variety of taxes, some of which may not be fair, are likely oppressive, and are certainly inefficient. Often they’re intended to attain social goals, not merely revenue ones.

Sales taxes, value-added taxes and the increasingly notorious tax on carbon dioxide – the carbon tax – are the most efficient taxes. But they’re also considered the most regressive, as they are disproportionately punitive on lower-income households.

Excise or sin taxes target unessential goods such as tobacco, alcohol, cannabis now and sometimes sugar. They try to modify behaviour so consumers become healthier. However, evidence of the effectiveness of these taxes is meagre. Fuel excise taxes, for example, punish drivers to supposedly fund the roads they drive on.

Payroll taxes are meant to fund pension and unemployment insurance programs. But they have the unintended effect of discouraging hiring and the pursuit of employment, since they increase the employment cost burden.

Property taxes and property transfer fees are supposed to fund schools and infrastructure. In reality, they go into a general revenue pot. In practise, property tax revenue is adjusted to meet budget needs, not the other way around.

A land tax, which some economists favour over property taxes, would likely reduce property speculation. But it wouldn’t necessarily reduce the artificial scarcity from restrictive zoning and permitting that reduces supply and raises prices.

Wealth taxes don’t exist in Canada and are rare elsewhere in the world.

Tariffs and duties, once the main source of income for national governments, are now a very small part of the pie. It’s a similar story for permit and registration fees, fines and other government charges.

That leaves income taxes, corporate and individual, as the main and least efficient sources of government revenue.

Individual income tax is much higher than corporate tax. According to the Canadian Taxpayers Federation, in 2014 the 8.4 per cent of taxpayers who earned $100,000 or more paid 51.8 per cent of all income tax. And 33 per cent of Canadians, generally earning well under $50,000, paid nothing.

There are some costs that lower-income households bear that are brought about by government policy, via regulation. These can be alleviated by such measures as the Canada Child Benefit and other transfers, a negative income tax, or a credit to employers and employees to offset the first expensive chunk of payroll taxes.

Estate taxes discourage investment and punish people who accumulate capital that helps to grow the economy and generate jobs.

The quest to equalize outcomes is ultimately mean spirited, punishing those who succeed. And it further exacerbates the productivity and growth problems nagging this country.

Ian Madsen is a senior policy analyst at the Frontier Centre for Public Policy.


death, taxes

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