The COVID-19 crisis has shined a spotlight on inequality in Canada, renewing a national conversation about the role taxation should play to address disparities and pay for the costs of the pandemic.
“We’re all in this together” is an expression that became popular in the early days of the pandemic. Scrawled in chalk on sidewalks and on signs in closed-up storefronts, the phrase reminded Canadians they were not facing this unprecedented crisis alone. However, in Canada as elsewhere it soon became clear that individuals of different socio-economic status were experiencing the pandemic in extremely different ways.
Multiple studies soon showed infection rates were higher in poorer neighbourhoods, including racialised communities. Workers at the bottom of the pay scale were also more likely to lose income and employment due to the virus. Meanwhile, in Canada as in the United States, the wealth of Canada’s billionaires increased by close to 30 per cent, and over C$50 billion in total in the six months of the pandemic from early April to October.
This comes on top of decades of growing inequality. A recent report by Canada’s independent Parliamentary Budget Officer found the top 1 per cent held more than a quarter of all wealth in Canada in 2019[i]. This was up from 17.9 per cent in 2010.
While the rich are getting richer, average and lower-income families are not seeing the same gains. Studies by Credit Suisse show that between 2010 and 2019, only Canada’s 1 per cent increased their total share of wealth while the share of all other groups declined or stayed the same[ii].
Even some members of Canada’s wealthiest families have come out in support of wealth and inheritance taxes. Resource Movement, a group of young wealthy Canadians, launched a campaign earlier this year calling on the federal government to tax their wealth. Members have spoken to media about why they feel a wealth tax is critical right now to provide public services for those less fortunate. As one member argued, philanthropy is an inadequate replacement for properly funded programmes and services delivered through the tax system.
Inspired in part by proposals from US Senators Bernie Sanders and Elizabeth Warren, Canada’s New Democratic Party (NDP) proposed an annual net wealth tax of 1 per cent on fortunes of over C$20 million in its platform during the 2019 election.
This proposal has provoked heated debate about whether Canada needs a wealth tax, but it is extremely popular with the public. Pre-pandemic polling found majority support (67 per cent) for a wealth tax among Canadians of all ages and political leanings, including Conservatives. Since the crisis, support for taxing the rich has increased with to 75 per cent of Canadians endorsing a wealth tax, according to a May 2020 Abacus Data poll.
With the federal Liberals in a minority position in Canada’s Parliament, they are dependent on support from one of the opposition parties to remain in power. The party that has been willing to support them is the NDP and they have made tax fairness and introducing a wealth tax to fund expanded social programmes a priority.
In its September 2020 speech from the throne laying out its agenda for this session of Parliament, the governing Liberal Party appealed to NDP support by promising to expand social programmes and introduce tax fairness measures, including to “identify new ways of taxing extreme wealth inequality”.
Canada is the only G7 country without some form of inheritance, estate, or wealth tax, so the federal Liberals will have a number of different options to choose from. They haven’t revealed what they are considering yet among the different options. These could come in the government’s fiscal update in November or more likely in the Spring budget for 2021/22.
However, given the strong popular support for annual wealth tax on the super-rich, and the position of the federal NDP, an annual wealth tax should be the preferred option.
Critics of a wealth tax counter that it would not generate significant revenues due to tax avoidance by wealthy individuals. Canada Revenue Agency has estimated that wealthy Canadians are already hiding up to C$240 billion in foreign accounts and tax havens, legally dodging up to C$3 billion a year in federal tax. Critics warn that introducing a wealth tax would only encourage even more offshore tax dodging by the richest Canadians which would undermine any revenue gains.
Despite this, the Parliamentary Budget Officer (PBO) calculated that the NDP’s proposed wealth tax would raise over C$70 billion over 10 years--and that’s after assuming that the wealth tax base shrinks by 35 per cent through tax avoidance and other factors[iii]. PBO estimates show that there are approximately 30,000 Canadian families with net wealth of C$20 million or over, who would be affected by the NDP’s proposed net wealth tax, representing less than 0.2 per cent of all Canadian families.
Tax avoidance is a critical factor in the success or failure of wealth taxes. Tax avoidance by the wealthiest individuals has contributed to growing inequality, and fuelling support for measures such as wealth taxes, but as opponents of the tax point out, if the richest individuals are already dodging taxes, how can a wealth tax be successful? Advocates for wealth tax have underlined that these tax measures must be accompanied by closing other loopholes, much tougher anti-avoidance measures, and more funding for tax authorities to investigate and prosecute tax dodging.
Improving the government’s capacity to combat tax avoidance has the potential to generate additional revenues beyond those of a wealth tax. Studies in Canada have shown that government spending on efforts against tax dodging pays off significantly. The PBO found increased funding for the Canada Revenue Agency’s (CRA’s) business tax compliance programme generated nearly six dollars in fiscal impact for each additional dollar of funding since the 2015-16 fiscal year[iv]. Under the federal Liberals, the Canadian government has increased funding for the CRA to audit and enforce offshore tax compliance and are taking advantage of the new information and powers they have obtained through the OECD’s Base Erosion and Profit Shifting action plan.
Another question is whether taxing the rich results in the flight of capital should wealthy individuals seek out new jurisdictions. Research on whether the rich do flee as the result of taxes is divided. In his book The Myth of Millionaire Tax Flight Stanford University researcher Cristobel Young analysed data of millionaires and billionaires in the US and found that when rich individuals move, they do favour lower-tax states over higher-tax ones, but only marginally so, with just 15 per cent of migrations bringing a net tax advantage.
Similar analysis on a global scale, using the Forbes list of billionaires, shows most of the world’s wealthiest individuals (84 per cent) still live in their country of birth. Young notes that the majority of millionaires and billionaires have families and are already both socially and economically embedded in place. The wealthy, of course, consider many other factors when deciding where to live, such as quality of education, healthcare, infrastructure, and other public services that are funded by taxes.
While some argue wealth taxation would discourage entrepreneurship and investment, others warn that not addressing wealth inequality carries its own risks to the economy. In early 2020, the International Monetary Fund’s (IMF’s) director Kristalina Georgieva cautioned that more progressive taxes and social spending are needed to reduce inequality and create opportunities. The IMF again recently warned of a growing recovery gap between rich and poor, worsening economic outlooks.
Canada’s deficit is projected to reach over C$343 billion this fiscal year, more than six times its previous record. If the Liberals fulfill the commitments that they made in the throne speech to invest in job creation and stronger social supports, the deficit will increase even further.
It is too early to know how the Canadian government will fulfil its commitment to “identify new ways of taxing extreme wealth inequality”– but with its deficit and debt rising rapidly, while the fortunes of the wealthiest continue to increase, the pressure will remain very strong to deliver. And with a Democrat in the White House also under pressure to deliver on tax fairness, there’s no question that pressure will increase—and Canada may finally rejoin the ranks of major nations with some form or wealth, inheritance or estate tax.
[i] Estimating the top tail of the family wealth distribution in Canada, Office of the Parliamentary Budget Officer, Ottawa June 2020. https://www.pbo-dpb.gc.ca/web/default/files/Documents/Reports/RP-2021-007-S/RP-2021-007-S_en.pdf
[ii] Global Wealth Databook 2010, Global Wealth Databook 2019 (Zurich: Credit Suisse, 2010 and 2019), Jim Davies, Anthony Shorrocks and Rodrigo Lluberas. https://www.credit-suisse.com/about-us/en/reports-research/global-wealth-report.html
[iii] Cost estimate of election campaign proposal: net wealth tax. Office of the Parliamentary Budget Officer, Ottawa, September 2019. https://www.pbo-dpb.gc.ca/web/default/files/Documents/ElectionProposalCosting/Results/32630202_EN.pdf?timestamp=1605109227037
[iv] Estimating the return of additional federal spending on business tax compliance. Office of the Parliamentary Budget Officer, Ottawa, October 2020. https://www.pbo-dpb.gc.ca/en/blog/news/RP-2021-026-S--estimating-return-additional-federal-spending-business-tax-compliance--rendement-estime-depenses-federales-additionnelles-observation-fiscale-entreprises
Toby is the Executive Director of Canadians for Tax Fairness. He has 30 years experience working as an economist in public, private, non-profit sectors, specialising in Economics, Fiscal and Tax Policy.