Taxing Wealth to Create a More Equal Canada
This is a longer, wonkier version of a piece I wrote for National Newswatch.
As part of a broader fair tax agenda, Jagmeet Singh and the federal New Democratic Party have proposed a wealth tax. This is intended to fight obscene and rising levels of economic inequality by limiting the concentration of wealth in the hands of the very rich, who can well afford to pay more, and by generating new fiscal resources to be invested in equality-promoting programs such as expanded public health care and student debt reduction.
A report released by the Parliamentary Budget Office (PBO) released on September 10, just as the federal election got underway, confirmed that the wealth tax would raise $70 billion over ten years. Very significant new federal revenues of $6 billion rising to over $7 billion would be raised each year, even though the proposed levy is quite modest.
The NDP wealth tax would be applied at a rate of just 1% on wealth (assets minus liabilities) above a high threshold of $20 million. The vast majority of affluent families let alone ordinary working Canadians would be completely unaffected. Even a family with $25 million in wealth would pay just $50,000 (1% of $5 million.)
Statistics Canada data for 2016 show that the median Canadian household (half have more and half have less) has a net worth of just $295,100 – usually representing equity in a home and modest savings.
The bottom 20% of families have almost no wealth at all. To get into the top 10% takes wealth of $1,650,000, which sounds like a lot but is not untypical of older Canadians with a mortgage free home in a large city and significant pension savings. The top 10% hold about 60% of all wealth.
The Statistics Canada data show that wealth inequality has been rising, but understate its true extent since household surveys are unlikely to find billionaires at home, and billionaires do not like to disclose their assets. Economist Lars Osberg estimates that the share of all wealth of the top 1% may be as high as 20% compared to a reported share of about 10% baed upon household surveys of wealth.
For that reason, the PBO study takes into account reports of large wealth holdings such as an annual list of the richest Canadians compiled by Canadian Business. They create a synthetic database using Canadian Business reports, and the Survey of Financial Security. It should be noted that they expect the rich to avoid about one third of the theoretical increase in government revenues through tax avoidance strategies.
The PBO numbers showing that a wealth tax would raise a lot of money again confirm that wealth in Canada is extremely concentrated in the hands of a very small group of the ultra rich. Even a small levy would raise a lot of money since those with wealth of more than $20 Million own a LOT. At these rarefied levels, wealth is made up mainly of financial assets, especially large shareholdings in both public and private corporations. Often, these family fortunes are passed between generations.
David Macdonald of the Canadian Centre for Policy Alternatives reports that the top 87 Canadian family fortunes averaged just under $3 billion in 2016, up by a stunning 37% from 2012 compared to an average increase of 16%. These large fortunes totalled $259 billion, the same amount shared among 12 million Canadians at the lower end of the wealth ladder. Inherited family wealth looms large at the very top of the list, and there is relatively little turnover from year to year
Another recent global study finds that there are 10,840 “ultra high net worth” fortunes of $30 million or more in Canada and that the total wealth of this group is over one trillion dollars – $1,100,000,000,000.
Thomas Piketty has famously shown that the wealth of the very rich tends to rise at a much faster rate than the wealth of the many, unless strong countervailing political forces come into play. High levels of wealth inequality also increase income inequality, and convey massive economic and political power to the few. Many fear that the ever-increasing concentration of wealth in the hands of the very rich threatens democracy itself as we return to the ultra unequal world which existed in the late nineteenth century and first half of the twentieth century.
Seen in this context, the NDP’s proposed wealth tax is a needed and quite modest measure. Such a tax already exists in a few countries, and is being proposed for the United States by Democratic contenders Elizabeth Warren and Bernie Sanders. Almost uniquely among major economies, Canada currently levies neither a wealth tax nor a tax on large inheritances (though lifetime capital gains are taxed at death.)
Some will argue that the rich “deserve” their huge fortunes. This hardly applies to inherited fortunes. The liberal John Stuart Mill famously argued in his Principles of Political Economy (Book 2) that a large progressive inheritance tax should be levied to ensure that private property did not become too concentrated in a few hands, and in order to prevent economic advantage from being inherited.
While much is made of the rise of the high tech billionaire so-called “wealth creators” progressive economists such as Joe Stiglitz and Lars Osberg in Canada argue that it is impossible to identify the individual productive contributions of individuals who work as part of large and complex social organizations. Quite unlike the textbook economics world of competitive markets, the actual economy is dominated by large and powerful corporations run mainly in the interests of their owners, and share ownership is highly concentrated. These corporations establish market dominance, drive down wages, fight unions, and lobby governments to heed their interests. CEOs and other senior corporate management insiders can and do pocket large incomes far in excess of their real productive contribution to the enterprise they lead or to the economy as a whole, and they are required to generate high profits distributed to the shareholders
The central point is that it is hard to argue that the distribution of wealth is fair if ownership of capital is highly concentrated in a few hands as a result of self-enforcing economic and political power.
Jagmeet Singh and the federal NDP are to be congratulated for taking the fight for greater economic equality to a higher level by challenging the growing concentration of wealth and power in Canada and by showing how a fair tax agenda can generate the resources needed to pay for a progressive policy agenda.
L. Randall Wray is a Professor of Economics at the University of Missouri-Kansas City and Senior Scholar at the Levy Economics Institute of Bard College, NY
“Well it’s very easy to reduce the inequality that results from low income, from poverty, from low wages; all you have to do is offer jobs. Minsky did a calculation [in] 1974 and Professor Kelton and I did one around 2000. We showed that if you just give a job to anyone who wants to work you will eliminate two thirds of all poverty, even if you pay only the minimum wage. We would like to see the job pay more than that, but even at a minimum wage you eliminate two-thirds of all poverty. So most poverty is due to joblessness. People who cannot get jobs or maybe they get jobs that last a few months and then they are unemployed again. We need permanent jobs that pay a decent wage and you’ll eliminate most poverty. You’ll still need some kinds of anti-poverty programs but the jobs are the best anti-poverty programs there are, then you need something else to fill the gaps.
Now that still leaves inequality due to extremely high income at the top. This program by itself doesn’t address that kind of inequality. I do think you need to address that, not because a lot of progressives think we need to tax the rich in order to spend on the poor. That’s just wrong, we don’t need to tax the rich more to spend more on the poor, because our sovereign government can’t run out of money, it can always spend more on the poor without taxing the rich. You want to tax the rich because they are rich, you don’t tax them in order to give more to the poor. You tax the rich because they’re filthy rich and so you shouldn’t link the two in policy. In the public’s mind we need to do both, but they are separate policies. You set the tax on the rich not to equal spending on the poor. You set the tax on the rich and make it high enough so that they’re not rich. If that’s your goal – get rid of the excessive riches of the rich -you tax enough so they are not excessively rich. It’s an extremely hard thing to do politically. The final thing is rather than trying to do this with taxes, which is hard because once people have income, especially high income, they have an incentive to protect it, the means to protect it, the means to influence policy, and they are extremely powerful. In practice I think in the US, it is actually impossible to take away income from the rich through taxes because they buy off the politicians, they get special exemptions, they never pay high tax rates, they hide their income, they put it overseas, and so on. The only way that will work in a country like the U.S. is to prevent them from earning the income in the first place. You have to do something like set maximum pay for CEOs. There is no reason why a CEO should be earning 300, 500, or 600 times more than the average worker. Set a maximum and say if a corporation pays more than the maximum, it should not be more than 50 times the average employee. If a corporation pays more than that they lose their papers of incorporation.”