The introduction of a wealth tax in Canada is a recurring subject that has drawn new interest during the current COVID-19 crisis. It’s a temptation best ignored.
In the 2020 throne speech, Prime Minister Justin Trudeau said, “The government will also identify additional ways to tax extreme wealth inequality,” arguing that it will help the middle class and help pay for expensive measures taken by the government.
But the results in countries that have or had wealth taxes show another reality. Introducing special taxation for the rich doesn’t have the expected impact and is in fact counterproductive.
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France taxed the rich and said goodbye to them
The French example, introduced in 1982, reveals that the rich go abroad when a wealth tax is introduced.
A study by Gael Campan, senior economist of the Montreal Economic Institute, shows an average of 510 wealthy households left France each year for 33 years. This capital migration is estimated at €143 billion to €200 billion in 2015 inflation-adjusted values.
When rich people leave a country, they take their wealth with them, resulting in a loss of revenue for their origin countries. They don’t pay any income tax (most countries don’t have system that taxes citizens living abroad like the United States) and don’t pay any value-added taxes.
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This lost capital could also have been used to create jobs and boost the economy.
The French think-tank IFRAP Foundation estimates the loss of employment due to this capital flight at 400,000 jobs, representing 1.9 to 2.8 per cent of France’s total employment. The French example, then, shows how a wealth tax can be counterproductive for the economy and the state’s tax revenues.
An exit tax is sometimes seen as a way to discourage fiscal migration. France has such a system but it doesn’t change the trend, showing that departure is difficult to stop when the budgetary environment is unfavourable.
Wealth tax also has a negative psychological effect. Wealthy people are seen as a problem and their departure contributes to creating a bad image of the country for investors and entrepreneurs.
The tax burden has also led young and skilled people to flee France. These economic migrants aren’t directly targeted by the wealth tax but it certainly creates an unstable fiscal situation for them.
Canada must attract, not repel, the wealthy
Ironically, Canada has benefited from the French wealth tax. Based on studies by New World Wealth, a market research firm based in Johannesburg, South Africa, in 2016 8,000 millionaires immigrated to Canada. France is cited as one origin country of this migration.
The wealth of high-income people is rarely inherited; rather, it’s created. In 2007, only 15 per cent of the wealthiest one per cent of Americans’ net wealth was inherited. In 1989, inherited wealth was 23 per cent. So most of the wealth of rich people is created by themselves and not by their ancestors.
As Campan reported, “Entrepreneurs on the rise today could become part of the top one per cent in as little as five or 10 years.” A wealth tax would block entrepreneurship, and the creation of economic growth and jobs. And those factors will help end the COVID-19-induced economic crisis.
Canada must choose policies that continue to attract wealthy people to invest in the country, and policies that won’t hurt budding entrepreneurs. High taxation isn’t an effective solution for massive government deficits – it simply hampers economic recovery.
It’s no surprise that most European countries have repealed their wealth taxes. In 1990, 12 European Countries had wealth taxes; in 2018, only three remained.
Even French President Emmanuel Macron – whose liberal policies closely align with Trudeau’s – removed the wealth tax in 2017 “for all assets other than property” and has refused to reintroduce it during the COVID-19 crisis.
Alexandre Massaux is a research associate with the Frontier Centre for Public Policy.