Wealth taxes ultimately cripple economic growth

Wealth taxes ultimately cripple economic growth
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The rich are rarely satisfied with merely accumulating assets. They want to build on success, putting their earnings into new ideas, venture capital funds and angel investments

There has been increasing clamour from some circles to impose a wealth tax upon Canadians. The usual government-expanding social ‘democratic’ pressure and interest groups are especially enthused by the idea. They also claim it’s 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 with more than $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 was fully informed about this notion, they should 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 tried. This type of measure has been repealed in many nations, including France, Italy, Germany, even tax-happy Sweden, and several other smaller European countries.

And the tax only raised about 0.2 per cent of gross domestic product, on average, according to the Organization for Economic Co-operation and Development (OECD).

The tax encouraged wealthier individuals, families and their firms to flee to jurisdictions with lower taxes. 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.

The tax also hurt people and companies that were asset-rich but had low cash flow. Assets had to be sold in some cases.

Executives took more income in the form of stock options, which are hard to value until exercised, or in perks rather than outright share awards. They also borrowed more money, lowering their net worth. As well, those targeted often distributed more money to family members, friends, their communities or charities to lower apparent wealth. They also bought art and other collectibles, which are hard to value.

Difficulties in valuation are another problem with wealth taxes. While we know the price of actively traded shares in corporations, other major asset categories – bonds, private company shares and debt, mortgages and real estate – are either far less liquid or more turbulent. They have to be appraised using subjective estimation techniques.

As one of the fundamentals of finance is to be conservative, this would tend to value less liquid assets at the lower end of any range. These values could also gyrate wildly, as interest rates and economic growth projections change, along with wildly fluctuating risk premiums.

Valuation can be complicated when it comes to art and collectibles – including gold, silver and other precious metals, gemstones, jewelry, antiquities and inventories of goods and supplies or natural resources. Erring on the side of caution would cause valuation to be conservative.

So instituting yet another tax – which won’t generate much revenue – will be difficult and costly to administer. It will also discourage investment and wealth generation just to satisfy a loud minority who are either envious or resentful of those who are successful.

Essentially, it’s not rational – but politics rarely is.

The worst aspect of this idea is that it would punish those who build strong businesses, amass capital and contribute to the economy. At the same time, it would reduce incentives for dreamers and entrepreneurs to start new ventures that spur economic growth.

The rich are rarely satisfied with merely accumulating assets. They want to build on success, putting their earnings into new ideas, venture capital funds and angel investments.

Canada is trying to attract more people like Shopify founder Tobias Lütke, and to encourage and support those who are developing here today. Imposing a wealth tax would mean we have fewer of such people who spark the economy. The nation would be poorer for it.

By Ian Madsen
Senior policy analyst
Frontier Centre for Public Policy

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

Courtesy of  Troy Media

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