Recently, there has been an increasing clamour from some circles for imposing a wealth tax upon Canadians. The usual government-expanding social ‘democratic’ pressure and interest groups are especially enthused by the idea and also claim it is ‘popular’ among the public. A ‘one-time’ tax of three per cent on individuals with wealth above $10 million and five per cent on those above $20 million would supposedly net $60 billion; a one per cent tax on holdings above $10 million would glean $5.6 billion per annum. However, if the public were to be fully informed about this notion, they would find it less alluring.
The shortest answer to why this is a bad idea is that it has been a failure everywhere it has been foisted on the hapless citizens of the afflicted nations, resulting in the repeal of this type of measure in many nations, including France, Italy, Germany and even tax-happy Sweden, along with several other smaller European nations. The tax only raised about 0.2 per cent of gross domestic product, on average, according to the OECD, a group of industrialized democracies.
The tax encouraged wealthier individuals, families and their firms to flee to lower-tax jurisdictions. It also encouraged them to transfer assets, particularly more liquid ones, such as securities or ownership stakes in private companies or real estate, to other nations; or into non-taxable trusts. It hurt people and companies that were ‘asset rich’ but generated low cash flow; assets had to be sold in some cases.
Bosses also took more income in the form of stock options, which are hard to value until exercised or in perks and not in outright share awards. They also borrowed more money, lowering their net worth. They distributed more money to family members, friends, their communities or charities or religious bodies, to lower apparent wealth. They bought art and other collectibles, which are hard to value.
Difficulties in valuation are another problem with wealth taxes. While there is ready price discovery for actively traded shares in corporations, the other major asset categories, bonds, private company shares and debt, mortgages and real estate are either far more illiquid (i.e., infrequently traded, not traded at all, or prices are not visible or officially documented) or more turbulent in nature. They have to be appraised using methods that are just estimation techniques and can be subjective.
These methods are also very sensitive to the assumptions and other inputs into the valuation models. As one of the fundamentals of finance is to be conservative, this would tend to put the value of illiquid assets at the lower end of any range that is estimated. These asset values could also gyrate wildly, as interest rates and economic growth projections change, along with wildly fluctuating risk premiums.
When it comes to art and collectibles, including gold, silver and other precious metals, gemstones, jewelry, antiquities and inventories of goods or supplies or natural resources, some of them undeveloped or uncommercialized, valuation can be very difficult. Erring on the side of caution would, of course, cause valuation to tend to be conservative; i.e., lower than what might be foreseen.
Thus, instituting yet another tax, which will not generate much revenue, will be difficult and costly to administer and will discourage investment and wealth generation, just to satisfy a loud minority who are either envious or resentful of those who are successful, does not seem rational; politics rarely is so.
The worst aspect of this idea is that it would punish those who build strong businesses, amass capital and contribute to the economy, while reducing incentives to the dreamers and do-ers who create the new ventures and assets that, in aggregate, comprise the entirety of the nation’s wealth.
The rich are rarely satisfied with merely accumulating assets in general. They derive satisfaction from building on success; by putting their ‘winnings’ into new ideas, the venture capital funds and ‘angel’ investments that are the future Shopify’s and Tesla’s or restructuring existing laggard firms or assets.
Canada is trying to attract more Tobias Lütkes (founder of Shopify) and Elon Musks and encourage and support the ones that are developing here today. Imposing a wealth tax will mean fewer major or minor moguls in future, whether home-grown or enticed from abroad. The nation would be poorer for it.
Ian Madsen is a senior policy analyst with the Frontier Centre for Public Policy.
Photo by Hunters Race on Unsplash.
