COVID should make Canadians more skeptical of wealth taxes

It’s commonly assumed that because it disproportionately affected jobs in low-wage industries, such as restaurants, hotels and personal services, the pandemic must have increased inequality. But it didn’t. Statistics Canada found that “the household wealth gap declined in 2020, as net worth for the lowest two quintiles increased at a faster pace than the wealthiest 20 per cent.” Specifically, the wealth of the lowest two quintiles rose 23.5 per cent, compared to an 8.9 per cent gain for the highest quintile. That continues a trend that has seen the share of wealth going to the highest quintile fall from 68.5 per cent in 2010 to 67.9 per cent in 2019.

Several factors explain why less well-off people fared better during the pandemic. Most importantly, people in the two lowest income quintiles received massive government transfers—much more than they lost from working less. The main reason for this was that income support programs were poorly designed. As a result, they did not just replace lost income but substantially increased it across the income spectrum. In general, lower-income Canadians used this unexpected boost in income to pay down debt, which had the effect of increasing their net worth.

In addition, the nationwide housing boom raised house values for most people. But that benefited the wealthy proportionately less: housing is a smaller share of their assets. At the same time, many middle-class Canadians took out large mortgages (often to move out of crowded cities during COVID) and that slowed the increase in their net worth.

Wealth inequality very clearly declined in Canada during the pandemic. But on the eve on the next federal budget, which may include new tax policy, did the pandemic change the “wealth tax” conversation?

Governments issued record amounts of debt during the pandemic, so questions naturally arise about who should pay. But it’s interesting that there was no obvious increase in the popularity of a wealth tax during the pandemic. Both the NDP and the Green Party proposed wealth taxes during the 2021 federal election but their share of the vote declined. A wealth tax evidently was not regarded as pressing enough to change many votes.

During the last federal election all parties avoided the question of how to pay for huge government debts. But it’s only a matter of time before “the hunt for money” begins, as The Wall Street Journal puts it. When that hunt begins in earnest, some parties will likely again propose that the wealthiest Canadians get the bill, so they can “pay their fair share.”

Fair or not, extensive experience in Europe shows that wealth taxes do not raise substantial net revenues for governments. They are costly to administer; wealth is hard to define and measure; assets can easily be moved out of country; widely held housing and pension assets are invariably excluded; and the rate has to be kept low because of existing capital taxes (which mean that even modest wealth taxes quickly become punitive). As a result of disappointing revenues, most European countries that adopted wealth taxes soon abandoned them.

If anything, the pandemic should have made Canadians more skeptical of a wealth tax. The marked drop in inequality means it’s less pressing an issue than it may have been. Moreover, the debt burden looms large, especially as interest rates return to normal. The best way to reduce it is with faster economic growth. But a recent U.S. study on wealth taxes found they lowered overall incomes—as you would expect. That’s the exact opposite of what economic recovery needs.

Like most things, inequality is not black and white—there’s good inequality from entrepreneurs inventing products all the world uses, and there’s bad inequality that comes from rewarding ill-gotten gains: think Russian oligarchs. Higher inequality would benefit Canada if it meant our businesses were revolutionizing retailing, as Amazon or Walmart did, or technology as Google and Tesla are doing. But a wealth tax does not differentiate between good and bad inequality. It’s a blunt instrument that addresses none of Canada’s current economic problems, would harm Canada’s growth prospects and would do little or nothing to boost government net revenues.