A number of politicians in North America are warming to the idea of a wealth tax. In Canada, the NDP is proposing to introduce one on all net assets over $20 million. South of the border, Democratic hopeful Elizabeth Warren is proposing one that would kick in at US$50 million.
The NDP introduced the idea as a way to pay for a national monopoly pharmacare program, among other things. Beyond this vote-seeking aspect (who doesn’t want more “free” health care?), the appeal to “take the money where it is” calls for a warning.
A tax on wealth is a direct tax aimed at people with the largest estates. These assets might have been inherited or built up over years of hard work.
France has been experimenting with such a tax for some time. It adopted the “Solidarity Wealth Tax” in 1989, after having had a similar tax from 1982 to 1986. This tax is not indexed to income but to the value of the assets that people have accumulated.
This can lead to absurd and tragic situations, like the one French farmers on the Îsle de Ré off France’s west coast had to confront in 2005. They had spent their whole lives tending to family farms but found themselves forced to sell because real estate prices had gone through the roof and their modest farming income would not allow them to pay the wealth tax that now as a result applied to them.
Opponents of wealth taxes sometimes call them “confiscatory.” Let us examine, however, the real effects of such a tax that singles out, on purpose, a minority of citizens.
First and foremost, a wealth tax comes on the top of other taxes these individuals already pay, such as the progressive income tax or the capital gains tax. Hence, there is an obvious possible “Laffer” effect (higher taxes, less government revenue) to any additional tax that further encumbers the wealthy.
The most detrimental consequence for the Canadian economy, as it has been for France, would be the exodus of some of the targeted population. In the case of France, the ones who left were among the most industrious. Indeed, despite impacting a structurally older population on average (66 years in France) compared with other taxes, the wealth tax primarily drove away experienced entrepreneurs aged between 45 and 55. Although these might not form the majority of the targeted group, they are definitely the wealthiest. They found refuge in more fiscally lenient nearby countries like Switzerland, Luxembourg, and the U.K.
Different independent studies, and government reports as well, converge to estimate an average number of net departures at about 510 households per year, representing around 0.2 per cent of the one per cent. While this may appear like a small number of people, it is not insignificant. And to put it in perspective, at 10 million euros per household, over a period of 33 years, it amounts to some 170 billion euros of capital flight (or between 143 billion and 200 billion euros in inflation-adjusted 2015 euros, by different estimates). Moreover, it represents a sizable missed opportunity for investments in France’s economy.
The French studies conclude that the wealth tax is not fiscally efficient, with the value-added tax revenues foregone because of the exodus, far exceeding the wealth tax, not to mention other lost revenues. Also, the cost of collecting the wealth tax is twice as high as for any other tax. The aging population (most of them retired), the unpredictability of the tax base, and the complexity of the tax return are all flash points with the government.
In the end, the wealth tax will end up reducing government revenues (via foregone sales taxes, employer and employee contributions, corporate taxes, etc.) and new taxes will be required to make up the shortfall. But this time, the entire population will be targeted, including those who can’t leave the country so easily.
To sum up, the French experiment shows that a wealth tax is a demagogic ploy that ends up being counterproductive. Moreover, once created, governments tend to be reluctant to rescind it because of the anticipated political costs. Canadians would be well-advised not to fall for it in the first place.
Gaël Campan is a Senior Associate Researcher at the MEI. The views reflected in this op-ed are his own.