Raising Income Taxes, Instituting Wealth Taxes on the Affluent Will Hurt Growth, Prosperity and Jobs

Commentary, Economy, Ian Madsen

Lately, calls by self-identified ‘progressives’ and others who purport to champion ‘equity’ and compelling everyone to pay their ‘fair share’ have grown louder; even more shrill and strident. It seems that ‘social justice warriors’ have rediscovered their previously unknown inner fiscal conservatism, plus their usual zeal for redistribution and punishment for those with unfavourably ‘excessive’ income or wealth.

It is, indeed, income and wealth that the non-labouring, non-entrepreneurial, non-investor and non-managerial class redistributionists wish to confiscate while simultaneously punishing those who earn income or produce wealth, for that is exactly what their proposals would do.

It is axiomatic that what you tax more of, you get less of. That is the whole idea behind steep excise taxes on tobacco, alcohol, cannabis products and gasoline and diesel fuel. It is also the motive for the carbon taxes imposed on fossil fuels, gradually being raised, annually, by the federal and some provincial governments: to discourage consumption of CO2-emission-intensive energy sources.

Raising marginal income tax rates on the highest income earners or introducing more brackets at which marginal rates are higher than existing ones, is the usual stratagem of politicians and government officials with an avaricious gleam in their eye. It is the most obvious and direct way of extracting more money from high earners or those deemed so in the class-envy world. Yet the results of such efforts are never as lucrative as they are forecast to be.

It is true that, in the short term, additional revenue can be derived from raising marginal rates.  However, the disincentives that higher rates create, make further revenue gains from those increased rates smaller and unlikely to increase faster than the nominal (i.e., not adjusted for inflation) growth rate in the economy. 

Those disincentives include reduced attractiveness of salary income, which is fully taxed and of current dividend, interest, rental and royalty income and realized capital gains. Managers and top executives at firms and organizations can bargain for or arrange for income to be deferred in the form of future pension income or to be earned in a foreign jurisdiction with lower tax rates. They can also be compensated more in company stock, share appreciation rights, stock options or non-cash perks. They could also arrange to create a personal corporation and consult their ‘former’ employer, taxed at a lower corporate rate and find more expenses to offset their new revenue, i.e., formerly income.

The companies that pay higher income employees can pay them less and reward them with stock which will increase further in value as the firms reinvest the money in the company or by acquiring other companies which will tend to boost share prices, which does nothing to increase the government’s income tax take until capital gains are realized and those gains are taxed at a lower rate than ordinary income.

Rearranging compensation and deferring or avoiding higher taxation has its limits. Outright evasion can also occur. Along with all these other issues and influences, the prospect of lower current after-tax income will make it harder for companies and other organizations to attract the highly qualified people they need to manage their outfits effectively, efficiently and with some vision and wisdom.  

Less effective and productive firms and other organizations will, overall, reduce productivity growth of the economy, the nation and the ultimate tax-generation capacity of the economy. The well-known Laffer Curve is a more general description of the trade-offs: raising marginal rates by x per cent will not produce the projected revenue; after a certain level, it can even decrease the government’s take. Conversely, lowering marginal tax rates on income and capital gains can not only increase government revenues but also increase the share of income tax paid by the highest-income taxpayers. 

A greater share of income going to the government and not reinvested in productive capacity or innovation will mean a slower rise in living standards, diversification of the economy and opportunities and lower employment growth and less entrepreneurial dynamism; i.e., fewer new businesses formed and people hired. There are already major problems in productivity growth and nurturing of new, technology-savvy businesses to the level where they generate substantial cash flow and job openings.

As for taxing wealth, that is even more likely to be disappointing in its potential revenue. Along with hiding or underreporting assets, there are other problems with this type of tax, in practice. Appraising the value of non-traded or illiquid investments such as real estate, collectibles, royalty rights or equity stakes in private firms is notoriously difficult. Those assets can be put in trusts for the benefit of spouses or children or foundations, which would then be taxed at a lower rate. Asset holders can simply leave the country; rich people have much more ease of migration than others do. 

Governments have found that wealth taxes raised little money and drove away wealthy people who generated jobs with their investments in companies, inventions and real estate. The Organization for Economic Cooperation and Development (OECD), an association of mostly advanced economies, including Canada, has studied wealth taxes and found them to be ineffective and not lucrative. As of 2017, just four nations in the OECD had a wealth tax, whereas ten of them had such a levy in 1990. Since 2017, one major nation, France, has discontinued its tax, as it had discouraged investment, driven away the wealthy and was generally dodged. When there is less wealth, there is less capital available to invest in the economy and the jobs of the future.

Governments have alternatives to improve their finances in the present and their fiscal sustainability in the future. They should restrain spending growth, cut inefficient or ineffective programs, sell off unneeded assets and Crown corporations and refinance debt into the far future at today’s ultra-low interest rates. Raising taxes on the productive will not raise much money and it will endanger the future wealth-generating and job-generating capacity of the economy and society, benefiting nobody. If anything, taxes should be lowered in general and on investment in particular, to create a more salubrious environment for the entrepreneurs and capitalists that make our standard of living rise.


Ian Madsen is a senior policy analyst with the Frontier Centre for Public Policy.

Photo by Jacek Dylag on Unsplash.