The introduction of a wealth tax in Canada is a recurring subject that regains interest with the current crisis. Indeed, in the 2020 throne speech, Canada’s prime minister 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 the expensive measures taken by the administration. But the results in the countries which have a wealth tax show another reality. Introducing special taxation for the rich doesn’t have the expected effects and reveals itself to be counterproductive.
France as a counter-example: Tax the rich and say goodbye to them
The French example, which was introduced in 1982 under the socialist government, reveals what happens when a wealth tax is introduced: the rich go abroad. Gael Campan, senior economist of the Montreal Economic Institute, showed an average of 510 wealthy households that left France each year for 33 years. This capital migration is estimated to be between €143 billion and €200 billion in 2015 inflation-adjusted euros. The consequence of the departure of rich people is that they leave the country with all their wealth. It leads to a loss of fiscal revenue for their origin countries: if a household leaves a country, they don’t pay any income tax (most countries don’t have an abroad tax system like the US) and VAT. Another problem of this migration is this capital could have been used to create jobs and boost the economy. For the French think tank IFRAP, in France, the amount of non-created employment due to this capital flight is estimated to 400,000, representing between 1.9% and 2.8% of the country’s total of jobs. Accordingly, the France example shows how a wealth tax can be counterproductive for the economy and the state’s tax revenues. It must be noticed that the exit tax is sometimes seen as a solution to discourage fiscal migration. France has such a system, but it doesn’t change the trend, showing that exile is difficult to stop when the budgetary environment is unfavourable. 
Moreover, the wealth tax has a negative psychological effect; wealthy people are seen as a problem and contribute to sending a bad image of the country for investors and entrepreneurs. The tax burden has led young and skilled people to flee France. If these economic migrants are not directly targeted by the wealth tax, this proves an unstable fiscal situation.
Canada must be a magnet for the wealthy and not a push-off
Ironically, Canada has benefitted from the French wealth tax. Based on New World Wealth’s studies, a market research firm based in Johannesburg, South Africa, in 2016, 8000 millionaires immigrated to Canada. France is cited as an origin country of this migration. If all millionaires don’t move to escape the wealth tax, this trend shows that Canada is one of the most attractive destinations for them.
The other problem is that the wealth of high-income people is rarely inherited but is created. In the US in 2007, only 15% of the wealthiest 1 percent of Americans’ net wealth is inherited. In 1989, the share was 23%. Accordingly, most of the wealth of rich people is created by themselves and not by their parents and ancestors. As Gael Campan showed: “Entrepreneurs on the rise today could become part of the top 1% in as little as five or ten years.” A wealth tax would block entrepreneurship and the creation of wealth and jobs. Yet, it is the latter that can help to end the current economic crisis.
Canada must choose policies that continue to attract wealthy people to invest in the country and not hurt growing entrepreneurs. High taxation is not an effective solution for the government’s massive expenses if the economy cannot recover.
It is not a surprise that most European countries choose to repeal this tax. Indeed, in 1990, 12 European Countries had a wealth tax; in 2018, only three still have one. Even the French president Emmanuel Macron, which is close to the “modern liberalism” of Canada’s prime minister, has 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.
Photo by Chronis Yan on Unsplash.
