Why wealth taxes hamper economies and punish us all

What you tax more of, you get less of

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Ian MadsenCalls by self-identified progressives and others who purport to champion equity, compelling everyone to pay their fair share, have grown louder and more strident.

It seems these social justice warriors have discovered previously unknown inner fiscal conservatism, with their usual zeal for redistribution and punishment for those who they deem have excessive wealth.

It’s wealth that these non-labouring, non-entrepreneurial, non-investor and non-managerial redistributionists wish to confiscate while punishing those who earn income or produce wealth.

What you tax more of, you get less of. That’s the whole idea behind steep excise taxes on tobacco, alcohol, cannabis, and gasoline and diesel. It’s also the motive for the carbon taxes imposed on fossil fuels, gradually being raised by the federal and provincial governments to discourage consumption of CO2-emission-intensive energy sources.

Raising marginal income tax rates on the highest earners is the usual stratagem of politicians and government officials with avaricious intent. It’s the most obvious and direct way of extracting more money from high earners or those deemed so in the class-envy world.

Yet, the results of such efforts are never as lucrative as they’re forecast to be.

In the short term, additional revenue can be derived from raising marginal rates. However, higher tax rates serve as a disincentive to create more wealth, and so the tax gains falter.

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In that case, increased salaries are less attractive. Instead, top executives arrange for income to be deferred to pensions, moved to foreign jurisdictions with lower tax rates, or paid in the form of shares and other such compensation. They can also create personal corporations and become consultants for their employers, then be taxed at lower corporate rates.

Rearranging compensation and deferring or avoiding higher taxation have their limits. Outright evasion can also occur. And the prospect of lower after-tax income will make it harder to attract highly qualified people.

Less effective organizations then face reduced growth, hampering their tax-generation capacity and hurting the economy.

Conversely, lowering marginal tax rates on income and capital gains can increase government revenues and the share of tax paid by the highest income earners.

A greater share of income going to government rather than being reinvested in production and innovation will mean a slower rise in living standards, less diversification of the economy, and fewer job opportunities. There are already major problems in our economy, crippling growth and hurting new, technology-savvy businesses.

There are other problems with more heavily taxing the wealthy. Appraising the value of non-traded investments such as real estate, collectibles, royalty rights or equity stakes in private firms is notoriously difficult. Those assets can be put in trusts, allowing them to be taxed at a lower rate. Asset holders can also simply leave the country.

Governments have found that wealth taxes raise little money and drive away the people who generate jobs through their investments.

The Organization for Economic Co-operation and Development (OECD) has found wealth taxes ineffective and not lucrative. As of 2017, just four nations in the OECD had a wealth tax, whereas 10 had such levies in 1990. France has since discontinued its tax because it discouraged investment and drove away the wealthy.

Governments have alternatives to improve their finances and create fiscal sustainability. They should restrain spending, cut ineffective programs, sell off unneeded assets (like Crown corporations) and refinance debt into the far future at today’s ultra-low interest rates.

Raising taxes on the productive won’t raise much money and will endanger the wealth-generating and job-creating capacity of the economy. That benefits nobody.

If anything, taxes should be lowered, particularly on investments, to create a more attractive environment for the entrepreneurs and capitalists who make our standards of living rise.

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

Ian is one of our Thought Leaders. For interview requests, click here.


The views, opinions and positions expressed by columnists and contributors are the authors’ alone. They do not inherently or expressly reflect the views, opinions and/or positions of our publication.

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