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It is difficult to pick up a magazine or newspaper these days without reading an article or two which touches on the topic of wealth and income inequality and the growing concern on how best to address it. The pandemic, raging inflation and enormous government deficits have only put more fuel on the fire. There is pressure on governments worldwide to use the tax system as one approach to address these issues, including targeting the wealthy, in one form or another.
Up until the 1980s, there was little talk of economic inequality because in the post-war era it remained relatively constant. While the income share of the top 1% of income earners in Canada and the U.S. was very high in the 1920s, it fell during the 1940s, and rose only marginally in the 50s, 60s and 70s. Full employment, migration from farms to cities, increased education, more women in the workforce, increased productivity due to technological change, and rising unionization allowed for incomes to grow for the bottom 90% relative to the top 10%.
But from 1980, the economic literature has shown a clear long-run trend upward in the income share in particular of the top 1%. The new "normal" is increasing inequality not equality, and it seems that going forward there will be more, and not less inequality.
Middle-income earners have seen their incomes stagnate or decline. The widespread perception is that they have missed out on economic growth, and that there is an excessive concentration of wealth at the top.
This has created political instability, division, and undermined social cohesion. Worldwide, we have increased populism, the search for "solutions", rising authoritarianism and the emergence of "strong man" leaders, and increasing attacks on the wealthy.
What impact will rising income and wealth inequality have on future tax policy?
The 2021 OECD Report "Inheritance Taxation in OECD Countries" makes the case for inheritance taxes, and concludes that a well-designed inheritance tax can raise revenue and enhance equity and equality of opportunity and reduce wealth concentration.
Several governments have introduced wealth taxes, such as Argentina and Chile, or have considered proposals for wealth taxes, including the U.S., the U.K. and Germany. The talk of wealth and inheritance taxes is part of political discourse in many other countries, including Canada.
In the Canadian context, there has been a lot of chatter and ink spilled over the last two-plus years on how and when the government will raise revenue to pay for the pandemic, but so far it has been restrained. While in the last federal budget there were no significant tax increases, the government did announce in it that it will be introducing a minimum tax on the wealthy because it says they do not pay their "fair share" because of the use of deductions and credits and planning to lower their tax bill. A 15% minimum tax was part of the Liberal party's 2021 election platform.
As well, the government did introduce Canada's new luxury tax that came into effect on September 1, 2022. The Select Luxury Items Tax Act imposes a tax on the sale and import of certain vehicles and aircraft priced above $100,000 and certain vessels priced above $250,000.
In the 2021 federal election, the Liberal party platform did not include a proposal for a wealth tax, although the NDP did. However, there were recent press reports that Prime Minister Trudeau requested briefings on the merits of a wealth tax before the 2021 election. In July 2021, the Parliamentary Budget Officer released a report which looked at how much revenue a one-time tax of 3% on wealth over $10 million would raise and a 5% on wealth over $20 million.
But would a wealth tax really make any dint in wealth redistribution, or instead simply increase government coffers? The challenging questions to be debated going forward will include whether income and wealth inequality are better addressed by other means and strategies, such as creating more equality of opportunity, including through education, and removing barriers to allow more social mobility, such as free or modest university and college tuition and skills training.
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