‘Making the rich pay’ doesn’t pay

Ottawa does not fully understand the consequences of its policy

Reading Time: 3 minutes

By Nathalie Elgrably-Levy
and Valentin Petkantchin

The federal government’s new luxury goods tax, which took effect on September 1, targets luxury cars, private jets and yachts. Without originality, it is part of the traditional logic of taxation which aims to “make the rich pay.”

Nathalie Elgrably-Levy
Nathalie Elgrably-Levy

Valentin Petkantchin
Valentin Petkantchin

However, we often forget the economic, indirect and longer-term effects, which show that this type of selective taxation does not “pay.”

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With this in mind, we have studied four tax measures regularly recommended to tax the “rich” more, like the new tax on luxury goods:

  • Wealth tax of one per cent levied on estates over $10 million;
  • Capital gains inclusion rate increased from 50 per cent to 75 per cent;
  • Federal income tax rate raised from 33 per cent to 35 per cent for income over $216,000;
  • Federal corporate tax rate of 15 per cent to 18 per cent.

In the case of each of these measures, the tax burden of the wealthiest taxpayers is theoretically increased. But we looked closely at their unexpected and often pernicious effects. And this is where the surprises begin.

First, we note that a tax on wealth discourages savings and investment and therefore constitutes a brake on economic growth without necessarily filling the coffers of the State. For example, an estimate of the impact of the implementation of such a tax in the case of Germany shows a direct gain of more than €14.7 billion per year but also a decline in GDP of more than five per cent as well as a loss of other tax revenues that depend on it – income tax, value added tax, corporation tax, etc. – €46.1 billion. In the end, a net loss of more than €31.3 billion annually.

We also observe that an increase in the capital gains inclusion rate would undermine Canada’s competitiveness on the international scene. This would reduce the entry of foreign investment and the potential for economic growth, particularly by penalizing capital financing and transfer to small businesses.

As for the increase in the federal income tax rate (from 33 per cent to 35 per cent), it principally penalizes taxpayers who participate in economic growth and makes Canada relatively less competitive in tax terms. It also hampers companies’ efforts to attract foreign talent. The fiscal loss alone is estimated at about $212 million per year when considering the federal and provincial governments as a whole.

Finally, like the previous measures, the increase in the federal corporate tax rate also undermines Canada’s competitiveness and attractiveness on the international scene and reduces business profitability. It slows down productivity growth, penalizing, in turn, employees, who see their remuneration increase more slowly.

“Make the rich pay” is a catchphrase but economically risky. By increasing the tax burden, regardless of the measure chosen from among those we studied, the government of Canada would trigger a multitude of pernicious effects that would push economic actors and businesses to invest less, work less, relocate, and export their capital and heritage.

Instead of increasing the tax burden on the rich simply because they are rich, the government of Canada should first consider all the ins and outs of the measures it is considering. It would then become aware that its initiatives are detrimental to achieving full economic potential by discouraging work, investment and entrepreneurship.

Ottawa should instead focus on initiatives that improve Canada’s competitive position internationally, particularly vis-à-vis the U.S., that make the country attractive for foreign investment and wealth creation. Above all, as the economy is a fragile and interdependent ecosystem, it should keep in mind that making the rich pay is making everyone pay!

Nathalie Elgrably-Lévy is a Senior Economist and Valentin Petkantchin is Vice President, Research at the Montreal Economic Insitute. They are the authors of Choking Hazard: The Adverse Effects of “Eat the Rich” Policies.

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Nathalie Elgrably-Levy

Nathalie Elgrably-Lévy has taught economics at HEC Montréal since 1992. She also taught economics for several years at the University of Montreal and at UQAM. She is the author of La face cachée des politiques publiques, published in 2006 by Les Éditions Logiques, and she produced a Quebec adaptation of the 6th edition of Microeconomics, by Pyndick and Rubinfeld. She is also a columnist with Le Journal de Montréal and Le Journal de Québec. She worked during part of 2008 as a senior economist with the Fraser Institute. She holds a master’s degree in management from HEC Montréal, with a specialization in applied economics and a thesis on the federal budget deficit. Her research interests focus on assessing public policy.

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