MINI-EP: Wealth Tax!

What if we started taxing the accumulated wealth of billionaires? Alex Hemingway, Economist and Public Finance Policy Analyst at the Canadian Centre for Policy Alternatives, joins Team Advantage to discuss his recent piece, A wealth tax on the super rich is within reach. How might we tax wealth, and what do the proposals to do so look like? What are the effects of massive wealth inequality in our society? How would we enforce a wealth tax? What other measures can be taken to address the growing inequality we face?

Follow Alex on Twitter @1alexhemingway, and follow his work at policynote.ca and policyalternatives.ca.

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Kate: Hello, and welcome to The Alberta Advantage. I’m your host, Kate Jacobson, and joining Team Advantage today are Joel —

Joel: Hello, hello.

Kate: — and Alex Hemingway, economist and public finance policy analyst at the Canadian Centre for Policy Alternatives, British Columbia office. Alex, thank you for joining us here on The Alberta Advantage.

Alex: Hey, thanks a lot for having me.

Kate: So, in mid-June, our listeners might have come across a pretty shocking headline: “Canada’s wealthiest families hold 25.6% of riches, new Parliamentary budget office says.” It turns out that this wealth, which is owned by the top 1% of Canada’s families, and worth roughly three trillion, represents an increase of 13.7% from previous estimates. Alex, you recently wrote a piece that got reprinted in a few places titled “A wealth tax on the super-rich is within reach.” To give our listeners a sense of what is in this article, could you first explain to us: what is the difference between a wealth tax and an income tax?

Alex: Sure, yeah. Well, so, I think an income tax is familiar to most of us, and that’s really what our personal tax system is centered around, so people are familiar with paying a tax on income that they’re receiving over the course of a year. And the distinction between income and wealth is wealth is the total stock of wealth that you’ve accumulated — all your assets minus your debts, you know, whether that be cash that you have in the bank, stocks you own, property you own — minus all the debts you have — whether that’s your mortgage, credit card, student loan. So that’s your wealth. And wealth tax would — as we’re talking about here, and as I describe in the piece — is an annual tax on that net worth or wealth, and, in particular, targeted at very, very wealthy households.

Joel: And just to be clear, is there currently any type of tax on wealth that you’re aware of?

Alex: No, in Canada, we certainly don’t have an annual wealth tax. We also are unusual — we’re the only country in the G7 without an inheritance tax, a tax on wealth at the end of life. So we’re an outlier there. We don’t have a wealth tax. And folks might notice we do have a probate tax at death, which is essentially just a very small administrative tax; if people are thinking about that, that’s not a wealth tax.

Kate: So what are the trends like when it comes to the wealthy or the super-wealthy? Like, can you give us a sense of the magnitude of how much wealthier these top 1% of individuals are compared to, say, the average Canadian?

Alex: So you mentioned one of the very interesting statistics at the outset — the new report from the Parliamentary Budget Office tells us that the wealthiest 1% in Canada hold 25% of our country’s wealth, which is really extraordinary. We at the CCPA  published a report looking at wealth inequality back in 2018, and what we did there was compare the wealth of the richest 87 families in Canada — this comes from Canadian Business Magazine’s “Wealthiest” list — and what we found is that, when you compare that to the average (or, actually, the median) family, typical family in Canada, the average of the billionaires is 4448 times as wealthy as the median Canadian family.

Kate: So, what are the effects on the rest of society, broadly speaking, from having so much wealth concentrated at the very top?

Alex: I think the effects are huge and they’re multifaceted. For one thing, this extreme concentration of wealth has helped create a false sense of scarcity. You know, we live in one of the richest societies in the history of the world; we know, today, we face some very big problems that need to be addressed: climate change, housing affordability crisis, homelessness, lack of affordable childcare in so many parts of the country, and we’re often told, “Yeah, it might be nice to address these thing — of course we all care about them — but it’s not realistic. We can’t afford to address them, at least at the scale that would truly begin to solve those problems.” That’s not true. We can afford it; we’re an incredibly rich country. It’s really just a question of so much of that wealth being accumulated and, frankly, hoarded at the very top of the wealth distribution. If we were able to share that wealth much more broadly, we’d be able to tackle some of the most important problems of our time.

Joel: So most people might be somewhat familiar with Thomas Piketty, who made a big splash in 2014 with his book “Capital in the Twenty-First Century.” And in that book, he points out that earnings on owning capital are subject to, basically, a kind of compound growth rate, whereas people who work for a living have seen their incomes basically stagnate, sometimes barely keeping up with inflation. What’s the danger of having the super-rich vacuum up larger and larger shares of global wealth while everybody else is barely treading water?

Alex: Yeah, it’s a great question, and this really just continues on those consequences of this extreme inequality. So, you know, I mentioned a moment ago — there’s some really interesting research that I cited in the article that we published a couple weeks ago from British epidemiologists who look into the effects of inequality internationally, across countries. And what they find is that higher inequality is correlated with lower life expectancy, worse health outcomes, worse mental health outcomes. So, on a human level, the effects are very serious. And in terms of, you know — some might suggest that maybe that’s the price we have to pay to have big, robust economic growth, and maybe we think that’s very important. And, again, the research would say otherwise, so even relatively conservative institutions like the IMF and OECD have published papers in the past few years pointing out that extreme inequality puts a drag on economic growth itself. And, you know, that makes sense when you think about it; when you  have a system that’s rewarding wealth itself, the returns — as Piketty discusses — the returns to existing wealth outpacing economic growth, well, that’s a system that’s, rather than rewarding innovation or rewarding people doing important work and working hard, it’s rewarding wealth itself, and it’s leaving the human potential of huge segments of the population untapped when we have so many people left struggling for affordable housing, for childcare, and so many other needs that we know aren’t adequately being met in this country and that we could, if we harnessed the wealth we have more equally.

Kate: So, not surprisingly, taxing the wealthy polls really, really well. And, in fact, in 2020, an Abacus poll commissioned by the Broadbent Institute found 75% support for implementing a wealth tax of 1-2%, and polling last year found that 69% of Canadians support a wealth tax of 2% on personal assets above fifty million and 3% on assets above one billion. Given the popularity of taxing the super-wealthy, have there been any political proposals to tax wealth, and what do these proposals look like?

Alex: Yes, there have. And before I get into that, I think one of the things that really stands out to me about this polling on wealth tax, both in Canada and in the US and in other countries, is that there’s this very strong, vocal support. It also extends across the political spectrum. So 69% of Conservative voters in Canada support a wealth tax in that most recent poll as well, so I think that’s worth keeping in mind. In terms of the proposals we’ve seen on the table in last year’s federal election — no, was that just last year we had a federal election?

Joel: Yeah, it feels like forever ago, but it was mere months ago, yeah.

Kate: Believe it or not, it was 2019, yeah.

Joel: [laughs]

Alex: [laughs] Hard to keep track of time these days. So last fall’s federal election — amazingly — included a proposal from the federal NDP for a 1% annual wealth tax on wealth over $20,000,000. So they put that forward as part of their platform. And that was really building on proposals that were emerging over the year prior out of the US: in particularElizabeth Warren, as part of her Democratic primary run, proposed a more aggressive wealth tax — the NDP one was a bit timid, actually — so her proposal would have a 2% annual tax on wealth over $50,000,000, and that would rise further to 3% on wealth over $1,000,000,000. And Bernie Sanders comes in and ratchets things up even further, and I think actually to quite an appropriate level. I won’t give you all the brackets, but it rises from 1% on wealth over $32,000,000 all the way up to an 8% annual tax on wealth over $10,000,000,000; so, ratcheting up as you get into those multi-billionaires.

Joel: Do you think there’s political will to implement a wealth tax in Canada? Canada’s current finance minister, Bill Morneau, is worth over $50,000,000, and his family firm, Morneau Shepell, is worth over $1,000,000,000. His wife, Nancy McCain, comes from the wealthy family behind the massive french fry maker McCain Foods Ltd. Has the finance minister responded to your proposal at all, and have you two chatted?

Alex: [laughs] No. No, we haven’t chatted. Unfortunately, I haven’t heard from the federal government about this proposal. I hope we do. You know, in terms of political will, I think it says something about our democracy — what do we mean by “political will”? We have 75% support, overwhelming support, for a policy at levels you rarely see on almost any issue, and yet it’s not really on the political agenda from the government in Ottawa, so I think that should concern us about our democracy. And I think part of what that means is that people really have to organize from the bottom up to force this type of issue onto the agenda, because there certainly will be pushback, even if politicians who put it in their platform were to come to power.

Kate: Absolutely, and we also know that the super-rich avoid — or, as I like to say, evade — taxes through things like getting their income through capital gains instead of through salaries or through the use of tax havens. Would we encounter similar evasion problems with a wealth tax as opposed to an income tax?

Alex: Yeah, so I think this the biggest concern that comes up for people. And I’ve heard it over the past couple weeks since we’ve published the article, I’ve heard it on call-in shows: “I like this idea, but the rich are just going to get around it.” And it’s a real issue. So there’s a few things to say about this. Maybe I’ll start with the design of a wealth tax itself. So, first of all, the way a wealth tax, or a well-designed wealth tax, would work — as proposed by economists like Emmanuel Saez and Gabriel Zucman down at the University of California who are doing really great and important work on this — for example, here in Canada, what it would mean is it applies to the household wealth of a very rich household worldwide; their worldwide wealth, not just wealth that they happen to have parked here in Canada. So, were they to illegally move their funds abroad, that wouldn’t help, okay? Now, I think that the bigger concern is that they may pursue illegal tax evasion, as you’re alluding to. That’s much more serious. That would be a crime; that is a crime, and it’s one that happens. And the good news is we know a lot about how to deal with both tax avoidance and evasion, and Zucman and Saez — who I mentioned, and Zucman in particular is one of the world’s foremost experts on tax havens — if you ask them, they’ll tell you that the reason that we have tax avoidance and evasion isn’t that we don’t know, in technical or economic terms, how to stop this type of behaviour, how to regulate it. We largely do know that. It’s the political will that’s missing, to put these measures in place and to enforce them. So, just to give one indication of that — again, back in our federal election in the fall last year here in Canada, the Parliamentary budget office examined proposals, actually from multiple parties, to increase enforcement resources to the Canada Revenue Agency. And what they found is consistent with the broader research on this issue, is the dollars that you put into additional enforcement pay off dramatically more than what you put in in terms of additional revenue collected. So we could be doing more of this. We should be. And there are also more specific aspects to enforcement that we could get into if you like.

Kate: Yeah, one thing I’m really interested in is how a wealth tax would be enforced. Because we’ve seen a pretty depressing trend when it comes to income tax enforcement where this enforcement focuses on easy cases — you know, where people are relying on straightforward wages for their income — where the more complicated schemes that are used by the super-wealthy require more work to decipher and more work to enforce, so they often get ignored. Could you go into a little more detail about what, precisely, would be needed to make sure a wealth tax was enforced?

Alex: You get at something really important there. The super-rich, of course, are not dealing with the taxes themselves; they’re hiring people to do this. There’s an industry, a financial service industry, that helps organize the tax arrangements of the wealthy to get the minimum tax bill possible. So part of our enforcement effort has to focus, actually — and Saez and Zucman really emphasize this, the economists I mentioned — has to focus on that industry that is enabling this type of behaviour. We have to expand our enforcement efforts into that industry. We also need to really, more forcefully, impose transparency requirements on banks and other financial institutions. We need third-party reporting of assets by these institutions. And, as I was mentioning a moment ago, we’re just going to need to increase the overall level of resources put into enforcement efforts and, importantly, focus those resources and enforcement efforts on the super-rich in particular.

Joel: When we look at the effects that a wealth tax proposal would actually have, would it actually start to erode this very lopsided share of wealth that the super-rich have? Like, they largely deal with percentages — do those percentages even start to eat into that pile of wealth, or would they just be kind of skimming what would have otherwise been added to the pile? And a sort of related question is: are single-digit tax rates enough? Should we look at double-digit stuff, like Bernie Sanders proposed at the upper range?

Alex: Yeah, this is a great question. And we’ve seen analysis of this in the US. So there’s a great little piece of analysis that looks at what the wealth of the Forbes 400 wealthiest in the US would have been had different forms of wealth tax been in place since 1982, and what you see is the Warren level of wealth tax that we talked about earlier — which is more aggressive than the federal NDP proposal that we saw in the last election — would only slow the increase in the wealth of the super-rich over time. So, as you allude to, it’s chipping away at the growth, but not actually the base level, of these really massive fortunes. The Sanders tax gets closer. Essentially, it’s not quite entirely flattening the growth — it’s almost entirely flattening the growth of these big fortunes in the US, looking back to ‘82 and projecting ahead to 2018. And that’s, as we’ve talked about before, that’s a very aggressive proposal we’re talking about; 8% on assets over ten billion. So, first of all, I think that would be a huge step forward to get something like that in place. If we think that these levels of fortunes are wrong in and of themselves, which I think I would count myself among those who think it is, then if you get into why — I mean, everyone contributes to these fortunes: the workers and companies of these wealthy people, the public investments that we all make, and infrastructure, physical or social, that makes our country work, that make any of these fortunes possible. It’s really all of our wealth. So the point being, to answer your question, we need to get aggressive, and we ultimately may need to get out of the single digits to actually bring those fortunes down over time.

Kate: So, you write that a wealth tax is merely one of several tools that should be available to reduce inequality, and one example is an excess profits tax. You wrote a piece in the Toronto Star in April that made the case to prevent profiteering as it relates to COVID-19. Could you tell us a bit about what an excess profits tax is and how it would apply, particularly in a situation like the current COVID-19 pandemic?

Alex: Sure, yeah. And, you know, we have experience with an excess profits tax here in Canada. In World War II, we had an excess profits tax in place. That was also true in the US and the UK. And essentially, what this means is that, above some quote-unquote “normal” rate of return for a company, any profits beyond that, the corporate tax rate that would apply would be higher. And the idea, back in the war — as in today — is that, you know, no one should make windfall profits from a crisis that’s causing so much suffering. And, you know, I think that’s particularly true when you look at the COVID-19 crisis — we have billions of dollars in public funds flowing to keep businesses afloat, and that’s important, that’s a good thing — no one should be profiting from that, and we should make sure of that. And of course, it’s important to say for many, many businesses right now, they really are struggling deeply, and it’s worth keeping in mind, and just mentioning for folks — when you think about how corporate income tax works in general, keep in mind that it only ever applies if a company is running profits. That corporate tax rate applies to the profits alone. If you’re struggling, if you’re not making a profit, if you’re making a loss for that year, you’re not going to pay any corporate tax, let alone an excess profits tax. So that’s worth keeping in mind. And, so, this is one simple mechanism that can ensure that those companies, particularly in the tax sector, that are booming under the current crisis aren’t profiting excessively. And, you know, I think an alternative proposal to that excess profits tax over and above normal profits, or a complementary proposal, would also be — and we did this in World War II as well — to also, during the crisis, raise the base corporate tax rate. Because, as we were talking about, any corporations that’s making profits during this crisis, I think it’s fair to ask that they chip in at a higher rate when so many businesses, and so many households around the country, are hurting.

Joel: Beyond a wealth tax and an excess profits tax, what are other policy solutions you think should be considered when it comes to addressing inequality?

Alex: Yeah, so these are some of the tools in our toolbox. Others that we at the CCPA and many others talk about are, for example: changing the way that we tax income on capital — so, capital gains in Canada, essentially, income that’s received that’s returned to capital rather than from labour or doing work. We give that special treatment in our income taxes in Canada; it’s taxed at half the rate that income from doing work is taxed at. That’s [laughs] I think most folks, when they realize that’s the case, instinctively think that’s very unfair. And so closing that loophole, equalizing the treatment of income from capital and labour, would help reduce inequality and raise revenues that we really need to make important public investments. Similarly, there are a range of loopholes or tax expenditures that primarily benefit affluent households. We got a report on this a couple years from my colleague David Macdonald called “Out of the Shadows” that lists, in detail, these tax expenditures, and shows how their benefits are distributed up and down the income spectrum. There are more loopholes we can close there. There are things we need to do in terms of corporate tax reform. One very interesting proposal that’s getting increasing attention around the world is to shift to a system of what’s sometimes called destination-based corporate taxation, and essentially, the point here is: one of the difficulties in corporate taxation is that big multinational corporations will shift their profits around between countries to shop for the lowest corporate tax rate. And one of the ways that they do this is by essentially selling their own intellectual property to different subsidiaries of themselves at some inflated price to artificially move their profits around. Well, what you can do with destination-based corporate taxation is say, “Actually, the way we’re going to divvy up the taxing of corporations internationally is to look at the actual sales of those corporations.” If you’re doing business in Canada, you’re selling your product to Canadians, you know, if you’re a company like Netflix or any other international corporation, we say, “Okay, the proportion of your sales that are in Canada, that’s the proportion of your overall, worldwide profits that we’re going to say is taxable in Canada.” And that way, there’s no incentive to shift things around. And there’s a long diversion on corporate tax reform, but just to get one other set of ideas in the mix here, I think that beyond the tax system, one of the things that we should be looking at is: when we look at our economic system and our economic institutions, why don’t working people have a say and a stake in the profits of the corporations where they work? Essentially, why don’t we have more employee or worker ownership of firms in our economy? These are the people doing the work, creating the value that is making these corporations very rich. And there have been some very interesting proposals on the table out of the US, out of the UK, over the past couple of years to actually, on a mandatory basis, require the largest corporations to shift — in general, these proposals have suggested, at a rate of 1% a year — the equity in those companies into a trust that would be collectively owned by people who work in those companies and would pay dividends to those workers. And it would also give them a seat at the table on the corporate boards which are, under current arrangement, exclusively controlled by the shareholders of companies, and say, “Actually, not only are we going to share profits, but workers in a company should have a seat and a voice at the table in terms of decisions that are being made at the highest level about about how a company is being run.” So I think those are really interesting areas that we should be paying more attention to. And the last thing I’ll say about them is that, again, when you look at the polling, it’s very striking how intuitive these ideas are to people and how popular they are, and this is another example of a policy that, for example in the US, polling is supported by a majority of Republicans in addition to an even stronger majority of Democrats. And, you know, this isn’t a completely unfamiliar idea. So, for example, we’ve seen instances of worker ownership — well, first of all, all around the world, including here in Canada, we have cooperatively-run companies in Canada. And one interesting example — we have a lot of, over the past couple of years have seen, a real problem with the closure of sawmills and pulp mills in BC in our forestry industry. And you know, the mill, the Harmac mill on Vancouver Island, was set to close ten years ago, and in fact what happened was the workers got together with the help of their union and actually bought out the mill before it was shut down and ran it themselves, and have been running it successfully since. And, you know, I think part of what this shows is that, in these types of scenarios where jobs are being lost, workplaces are being shut down, it’s often not necessarily because a business isn’t viable, but because it may simply not be profitable enough for the investors. So, you know, I think that this area of worker ownership is something to look at and pay attention to, and there are all sorts of interesting examples like countries like Italy, in the region of Emilia-Romagna: a third of the economy is made up of worker-owned cooperatives. So these are viable models, but they do need a public policy context in which to thrive, and that’s something that I hope we’ll be thinking about and exploring more in Canada.

Kate: Amazing. I think that gives me, certainly, and hopefully our listeners, a lot of food for thought. Alex, thank you so much for joining us here on The Alberta Advantage. If our listeners want to find out more about your work, where should they look?

Alex: Yeah, sure. Well, first of all, thanks a lot for having me, it’s been fun. And I am on Twitter — sometimes reluctantly, but fairly regularly — @1alexhemingway, and our work in the BC office at the CCPA you can find regularly at policynote.ca and nationally at policyalternatives.ca.

Joel: Alex, thanks for much for joining us. It was great to have you on.

Kate: Yeah, an absolute pleasure.


Alex: Thanks a lot.

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