Montreal, September 14, 2022 – Proposals to increase taxes on the rich resurface often in the news. Montreal Economic Institute researchers conclude in a new study that, however the term “rich” is defined, this selective taxation does not pay, due to its longer-term indirect effects. By penalizing those who create wealth, this gives rise to a number of adverse effects that threaten the prosperity of all Canadians.
“The point here is not to defend the rich, but it must be understood that by increasing the tax burden, the government would push economic actors to invest less, to work less, to move, and to export their capital and wealth,” explains Valentin Petkantchin, economist and Vice President of Research at the MEI.
“These negative effects are often missing from the public debate, yet they deserve to make up an integral part of it. For example, Austria, Germany, Sweden, and France eliminated their wealth taxes because of the economic harm they caused.,” adds Nathalie Elgrably, Senior Economist at the MEI.
Four popular fiscal measures that are bad for the economy
1) A 1% wealth tax, levied on fortunes over $10 million
This tax is politically alluring, but it is difficult to implement. Defining what constitutes taxable wealth, calculating the value of the assets of which it is composed at the precise moment when the tax is calculated, and curbing the problems of tax avoidance and capital migration are all obstacles to its implementation and administration. This measure also discourages saving and investment, as it reduces returns.
2) An increase in the capital gains inclusion rate (from 50% to 75%)
In addition to undermining Canada’s international competitiveness, which reduces the influx of foreign investment and the potential for economic growth, this measure misses the mark, since it would affect all taxpayers, including those of more modest means. In contrast, eliminating this kind of tax is beneficial.
3) An increase in the federal income tax rate (from 33% to 35%) for incomes over $216,000
This tax hike penalizes in particular those taxpayers who create wealth in the course of their work. It would incentivize individuals to modify their behaviour in the labour market, even tempting some to emigrate to a country with a more attractive tax regime.
4) An increase in the federal corporate income tax rate (from 15% to 18%)
In theory aiming to increase taxes on the owners of companies, this measure proves to be disappointing, as it would undermine the international competitiveness and attractiveness of Canada. It would also reduce the profitability of companies, which discourages investment, slows productivity increases, limits potential economic growth, and penalizes consumers and the Canadian population as a whole.
“Taxation is a delicate area where governments must act with a great deal of caution. Like nuclear energy that can illuminate cities if it is used properly or destroy them if it is not, taxation can fund public interventions but can also dig an economy’s grave. Thus, any modification of the tax regime must be scrupulously analyzed in order to identify all potential unintended consequences, notably those that would push economic actors and companies to invest less, work less, move, or export their capital and their wealth,” concludes Nathalie Elgrably.
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The Montreal Economic Institute is an independent public policy think tank. Through its publications, media appearances, and advisory services to policy-makers, the MEI stimulates public policy debate and reforms based on sound economics and entrepreneurship.
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Josée Morissette, Senior Advisor, Media Relations