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The Progressive Economics Forum

Should we be taxing the rich 1% more?

Louis-Philippe Rochon

Associate Professor, Laurentian Economics

Founding Co-Editor, Review of Keynesian Economics

Follow him on Twitter @Lprochon

 

Originally published by CBC. Find commentary here.

 

The federal Liberal Party’s recent election promise to create a new tax bracket for rich Canadians has been quickly decried by – well, rich Canadians. But is it an appropriate and sensible approach to fiscal policy? The answer is unequivocal: yes.

Understandably, Conservatives have been equally quick to denounce the proposal, calling it ‘Trudeau’s tax.’

Mr. Trudeau should not shy away from this epithet, but rather wear it proudly.

Yet Mr. Trudean’s idea is a far better and more balanced approach to fiscal policy than the Conservative’s overly-complex boutique tax breaks, tailor-made for specific voters, which apply to a few, wealthy Canadians.

There is considerable research on the economic benefits of raising taxes on the richest one per cent of Canadians. Many may choose to ignore research, but the empirical evidence is difficult to cast aside.

For instance, the Washington-based Economic Policy Institute has shown that raising taxes does not impede economic growth.  In fact, the last 3 decades’ policy of reducing taxes on the rich has had no statistically significant impact on growth.

Even the International Monetary Fund is now believes that the large income differences between the poor and rich should be reduced to encourage growth.

Lawrence Summers, former economic adviser to President Obama and U.S. Treasury Secretary from 1999 to 2001, agrees.

 

Taxing the rich good for the economy

I would go even further, however, and argue that increasing taxes on the rich 1% does even more than that: higher taxes on the one per cent actually contribute to greater economic growth.

How?

Increasing taxes on the rich and reducing them on middle-class Canadians will actually contribute to higher consumption levels, leading to more growth.

This is why the discussion on income distribution that is taking place around the world is so fundamental to our well-being. It is the skewed income distribution of the last three decades that is also, in part, responsible for the lower rates of growth today and the economic and financial crisis.

In other words, Trudeau’s tax is actually good economics.

But not everyone agrees.  Those who argue against increasing taxes on higher-income earners have been busy spewing some interesting misinformation.

First, Michel Kelly-Gagnon, president and CEO of the Montreal Economic Institute, recently argued that ‘rich Canadians sign paychecks.’

The implication is that because of their high incomes, rich Canadians create jobs.  Raising their taxes will contribute to job losses.

This is a ridiculous argument, of course. Individual rich Canadians do not hire and pay workers out of their own income.

 

Naysayers suffer from ‘historical amnesia’

Raising personal income taxes on higher-income Canadians will not have an impact on employment and will not create unemployment.

Moreover, those who predict doom and gloom if we raise taxes on the one per cent are suffering from historical amnesia.

Marginal tax rates in Canada were once much higher.

Did this lead to mass unemployment?  Of course not. The period between 1945 and 1980 was one of the best in our history.

Compared to the last three decades, we had on average lower unemployment and higher growth rates. How can we believe now that raising taxes will be detrimental the economy?

The facts simply don’t add up.

So those naysayers must reconcile their arguments with the facts of history.

Second, there has also been some mention of a hypothetical ‘psychological threshold’ of 50 per cent, above which, we are told, tax rates should never climb, as it would either fail to attract international private sector talent or lead to increased tax avoidance.

With respect to the talent, I always found this argument somewhat condescending.

There are a great many very talented Canadians qualified to lead our industries and institutions.

As for the argument about tax avoidance, is it not the government’s responsibility to ensure this does not happen by implementing the necessary and appropriate regulations? This can be done easily, so there are no reasons to believe this will be a problem, unless the government deliberately does not want to address the issue.

In the end, it is difficult to argue against the facts of history. They are there for everyone to see. Raising the tax rate on the one per cent is a sensible policy.

In October, Canadians will have a clear alternative between a broad-based tax policy that benefits a great many Canadians and our economy, and one that benefits a few, rich Canadians. Either way, the election campaign just got more interesting

Enjoy and share:

Comments

Comment from Purple Library Guy
Time: May 12, 2015, 11:57 pm

Trudeau’s tax isn’t exactly the ultimate in redistribution, mind you. Yes, taxing the 1% is a good idea. “Redistributing” the money to the top end of the upper middle class isn’t really optimum. People at the median income pay little or no tax in that second bracket where Trudeau wants to cut the tax rate. Trudeau’s plan takes away from the CEOs to give to the doctors and upper-middle-managers.

Comment from Ctee
Time: May 14, 2015, 12:38 am

Good god, the amount of hate for the so-called 1% here is insane.

The problem with taxing the rich is that it discourages people from working hard. Nobody wants to work 70-80 hours a week just to have half of it taken from them. Nobody wants to hone a skill half their life and become the best in their field just to have half the fruits of their labor taken from them.

It stops small business owners from wanting to expand, so new jobs won’t be created and production growth ends because the extra work isn’t worth it.

At the same time, it discourages people from wanting to become better workers. People are going to stop improving themselves because it’s not worth making it into the next tax bracket, or they work less hours.

Do you think the 1% will just sit here and let the government take everything from them? No way, they’ll move to the Cayman Islands or Singapore, or somewhere else that’s going to let them get richer. All the tax does is make our country’s economic growth less profitable for everyone involved. It limits supply by further discouraging it to rise any further. Meanwhile, demand hasn’t changed at all, or in your assumption, increases due to an increase in income. So prices will increase to balance this out.

Finally, the part about the tax rates. I don’t like throwing insults and I don’t like offending people, but I have to do it this time. You don’t know anything about the tax system. The marginal tax rates is only used to calculate the tax payable portion BEFORE tax credits using TAXABLE income, and the way taxable income is calculated is with total income MINUS DEDUCTIONS and NON-TAXABLE INCOME. So the marginal tax rate is useless without knowing what deductions and tax credits were allowed and what income was considered non-taxable income from 1945-1980.

“But Ctee, that’s easy. All we have to do is use the current income tax act and we’ll know”, right? NO. The current income tax is the Income Tax Act (R.S.C., 1985, c. 1 (5th Supp,)), which means its the REVISED statutes of Canada which was MADE in 1985. So it’s COMPLETELY DIFFERENT.

No matter how I see it, policies like this can only pass because people are jealous about the rich. I can understand hating the rich and corrupt, but the honest, rich people who got to where they are with innovation, productivity and efficiency have done nothing to deserve this kind of discrimination.

Comment from Lesley Durham-McPhee
Time: May 24, 2015, 5:52 am

What about increasing capital gains taxes? That’s where the real money is.

Comment from Brandon L
Time: May 25, 2015, 5:17 pm

I would gladly as CTEE pointed out, marginal rates came with deductions that were extremely generous/exploitable, with much income especially for the poor and middle class was never taxed at all. If we trade orange for a orange, deal but it has to be the exactly same marginal rates, same credits, and deductions, and same classifications for incomes that existed in the past.

Inflation and rising prices is the main reason why consumers are not spending more due to their decreased spending power since wages/salries/incomes dont match. Either prices must fall or wages must rise, and Im okay with prices & wages falling to the golden years 1940-60s

Comment from doconnor
Time: May 25, 2015, 11:12 pm

“Nobody wants to work 70-80 hours a week just to have half of it taken from them.”

The government is right to discourage people from doing that. They should reduce thier hours so someone else can be employed.

“Nobody wants to hone a skill half their life and become the best in their field just to have half the fruits of their labor taken from them.”

If they spend that much effort they probably love their field more then money.

“rich people who got to where they are with innovation, productivity and efficiency have done nothing to deserve this kind of discrimination.”

I suspect that these poeple are a minority of the rich. Most got rich through inheritance, tricks and luck. I expect most of those who got right throught innovation aren’t obsessed about money.

How do you explain the 1940s, 50s and 60s when the marginal rates where higher then 50%, yet there was higher productive and economic growth then we have today?

Comment from Brandon L
Time: May 26, 2015, 4:03 pm

@doconnor How do you explain the better distribution of wealth during post WW2 with lower nominal wages and salaries, and incomes associated with lower nominal prices?

Prices and incomes should have never risen to the nominal highs today that have created trillionaires where poor people never saw that under the gold standard.

Comment from Brandon L
Time: May 26, 2015, 4:06 pm

You can cry all day about the gold standard, but many “evil” corperations and “evil” rich people enjoy inflation that had never existed in the past.

Comment from Darwin O’Connor
Time: May 26, 2015, 5:07 pm

“How do you explain the better distribution of wealth during post WW2”

Higher marginal taxes, stronger unions and more activist governments.

It’s rich people who don’t like inflation because it makes the value of their money go down. It’s doesn’t effect poor people because they don’t hold on to much money.

Deflation can cause depressions because everyone holds on to their money waiting for prices to drop.

Comment from Brandon L
Time: June 4, 2015, 3:31 pm

The rich that keep getting richer enjoying the distribution, really the incomes the rich have are inflated. Honestly nothing is worth the price you find on paper. For example the minimum wage when first past and following years purchased more food and clothes and shelter and important services as healthcare. Adjust for inflation the minimum wage buys less today. Anwser deflation too me. You want my wages rise, if you the minimum wages is rised too 15$, inflation will force it to 16$, 17.50$, 20$, 40$ eventually. Deflation prevents nominal increases in wages, and eventually will have deflation but trying to prevent prices from falling today is a huge mistake the rich exploit and enjoy.

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