Taxing the rich won’t work
After five years of trying to boost the economy with more public spending, and with their debt level exploding, many governments around the world are being forced to change gears. Unfortunately, instead of doing the right thing – stop spending money they don't have – they're also trying to siphon off even more taxes from a small minority of wealthy taxpayers.
It won't work for two reasons.
First, there is simply not enough money around to plug the fiscal hole. For example, the US government just voted to raise taxes on individuals with incomes above $400,000. But the Heritage Foundation calculated in 2010 that marginal tax rates would need to rise to as much 142%, on everyone making more than $250,000, to eliminate that year's deficit.
Second, people can move with their feet. Which means we'll hear more stories like actor Gérard Depardieu's, who left France after the new socialist government imposed a 75% tax bracket on the rich.
Depardieu first bought a house in Belgium, home – along with Switzerland – to many wealthy French people who want to avoid punitive taxes including France's richest man, Bernard Arnault, who announced in September that he was seeking Belgian citizenship.
Last week, Depardieu again made headlines after receiving a Russian passport from President Vladimir Puti who happily advertised his country's flat 13% income-tax rate.
Of course, not everyone in Europe will want to move to Petrozavodsk to pay less tax. For that matter, few people will ever consider moving to another country for that reason. But you only need a few thousand of ultra-rich and/or ultra-productive people to make a difference.
Each year, 700 to 800 people who pay France's "solidarity tax on wealth" have left the country, resulting in billions of euros in net loss for the government.
In Canada, the new Parti Québécois government had to backtrack in October on its plan to increase the top income tax rate and taxes on financial gains when headlines started appearing in the papers about a real estate boom in the Ontario towns of Lancaster and Hawkesbury, just west of Montreal.
In the late 1970s and 1980s, the tax rate went down everywhere after supply-side economics had demonstrated that governments could get more revenues by remaining fiscally competitive. It seems we'll have to relearn that lesson all over again.
Michel Kelly-Gagnon is President and CEO of the Montreal Economic Institute. The views reflected in this column are his own.
* This column appears in Sun Media newspapers, published both in several of Canada's key urban markets (Toronto, Ottawa, Calgary, Edmonton, Winnipeg and London) and in its 28 community dailies.