Cross: COVID should make Canadians more skeptical of wealth tax

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Less well-off people fared better during the pandemic

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It is widely assumed that because it disproportionately affected jobs in low-wage industries, such as restaurants, hotels and personal services, the pandemic must have increased inequality. But that was not the case. Statistics Canada found that “the household wealth gap narrowed in 2020, with the net worth of the bottom two quintiles growing at a faster rate than the top 20 percent.” Specifically, the wealth of the bottom two quintiles increased by 23.5%, compared to 8.9% for the top quintile. This continues a trend that has seen the share of wealth accruing to the highest quintile rise from 68.5% in 2010 to 67.9% in 2019.

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Several factors explain why less affluent people have fared better during the pandemic. More importantly, people in the two lowest income quintiles received massive government transfers – far more than they lost by working less. The main reason for this was that income support programs were Poorly designed. As a result, they didn’t just replace lost income, but dramatically increased it across the entire income spectrum. In general, low-income Canadians took advantage of this unexpected increase in income to pay off their debts, which in turn increased their net worth.

Additionally, the nationwide housing boom has increased home values ​​for most people. But this has benefited the rich proportionally less: housing represents a smaller share of their assets. At the same time, many middle-class Canadians have taken on large mortgages (often to leave crowded cities during COVID) and this has slowed the increase in their net worth.

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Wealth inequality has very clearly declined in Canada during the pandemic. But on the eve of the next federal budget, which could include new tax policy, has the pandemic changed the conversation about “wealth tax”?

Governments have issued record amounts of debt during the pandemic, so questions naturally arise about who should pay. But interestingly, there has been no obvious increase in the popularity of a wealth tax during the pandemic. Both the NDP and the Green Party proposed wealth taxes in the 2021 federal election, but their vote share has declined. A wealth tax was obviously not seen as pressing enough to change many votes.

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In the last federal election, all parties avoided thinking about how to pay off the huge government debts. But it’s only a matter of time before “the hunt for money” begins, as the Wall Street Journal puts it. When this hunt begins in earnest, some parties will likely again propose that the wealthiest Canadians foot the bill, so they can “pay their fair share.”

Passable or not, extensive European experience shows that wealth taxes do not generate substantial net revenues for governments. They are expensive to administer; wealth is difficult to define and measure; assets can easily be moved out of the country; widely held real estate and pension assets are invariably excluded; and the rate must be kept low due to existing capital taxes (meaning that even modest wealth taxes quickly become punitive). Due to disappointing revenues, most European countries that adopted wealth taxes soon abandoned them.

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On the contrary, the pandemic should have made Canadians more skeptical of a wealth tax. The marked decline in inequality means that this is a less urgent problem than it perhaps was. In addition, the debt burden weighs heavily, especially as interest rates return to normal. The best way to reduce it is to accelerate economic growth. But a recent US study on wealth taxes have found that they reduce overall income – as one would expect. This is exactly the opposite of what economic recovery needs.

Like most things, inequality isn’t black or white — there’s good inequality between entrepreneurs who invent products that everyone else uses, and there’s bad inequality that comes from rewarding gains. badly acquired: think of the Russian oligarchs. Higher inequality advantage Canada if it meant our companies were revolutionizing retail, like Amazon or Walmart did, or technology like Google and Tesla did. But a wealth tax does not discriminate between good and bad inequalities. It is a blunt instrument that solves none of Canada’s current economic problems, would hurt Canada’s growth prospects, and do little or nothing to increase the government’s bottom line.

Philip Cross is a senior researcher at the Fraser Institute.

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