Studies show that higher taxes on the rich are bad and won’t pay off in the long run

Policies to increase taxes on the wealthy are often proposed, but a recent study by an independent public policy think tank found that punishing those who create wealth would be unrewarding in the long run and could threaten Canada’s prosperity. .

Entitled “Choking Hazards: The Negative Effects of ‘Eat the Rich’ Policies,” and conducted by the Montreal Economic Institute (MEI), the study We examine four fiscal measures that are routinely recommended to raise taxes on the rich, and how they can have the opposite of their intended effect.

“I understand that the point here is not to defend the rich, but by increasing the tax burden, governments encourage economic players to invest less, work less, move, and export capital and wealth. We need to do that,” said Petkantchin, MEI economist and vice president of research. press release.

Whatever the definition of the term “wealthy”, such selective taxation targets “the best performing economic actors in the market – those who create wealth,” the study says.

“Instead of trying to increase the tax burden on the rich just because they are rich, the Canadian government supports initiatives that will improve Canada’s international competitiveness, particularly its relationship with the United States, and make it more attractive to foreign investment. Wealth creation.”

The four common fiscal measures considered in this study are: 1% wealth tax on wealth over $10 million, increased capital gains inclusion rate (from 50% to 75%), increased federal income tax rate (from 33% to 35% on income over $216,000) %), and an increase in the federal corporate income tax rate (from 15% to 18%).

wealth tax

among them 2021 Federal Elections The NDP proposed to impose a 1% annual tax on people with net worth over $10 million.

However, the MEI said such a fiscal policy, while attractive, would be difficult to implement.

“Defining what constitutes taxable wealth, calculating the value of the assets that make it up at the precise moment tax is calculated, and curbing the problems of tax avoidance and capital movement all depend on their implementation and It’s a management impediment,” said the study. He added that the measure “discourages savings and investment because it reduces returns.”

Natalie Elgravry-Levy, senior economist at the MEI and co-author of the study, said that countries including Austria, Germany, Sweden and France “removed the wealth tax because of the economic damage it caused.” pointed to European countries.

“These negative effects are often overlooked in public debate, but they deserve to be an integral part of the debate,” she said in a release.

Inclusion rate of capital gains

In its 2021 charter, the NDP also committed to increasing the capital gains coverage rate used to determine an individual’s taxable capital gains and allowable capital losses from 50% to 75%.

MEI’s research shows that the measure has several undesirable and detrimental effects on the economy as a whole, affecting not only high-income taxpayers but also low-income taxpayers.

“It also increases the cost of venture capital and reduces the capacity of small businesses. [small and medium-sized enterprises] It attracts qualified workers, slows the mobility of capital in the economy, and ultimately jeopardizes productivity growth,” the study said.

“By contrast, getting rid of this type of tax would be beneficial,” he added, citing the example of Switzerland, where the non-taxation of capital gains allowed real incomes to rise while maintaining the overall level of tax revenues. rice field.

“Indeed, Switzerland, which was asked to decide in a 2021 referendum, rejected an initiative aimed at increasing the inclusion rate to 150%, as recently proposed in Canada, by a 65% majority. did,” said the study. Said.

Taxing large corporations

As for raising the federal corporate tax rate from 15% to 18%, which theoretically aims to raise taxes for business owners, the study found that “this measure will It has proven disappointing because it undermines the attractiveness of Canada.”

The authors 2010 survey A survey of corporate income taxes in 85 countries showed that “increase in corporate income tax has a significant unintended impact on investment, entrepreneurship, and ultimately economic growth.”

federal income tax rate

The MEI noted that the policy of raising the federal income tax rate from 33% to 35% on income above $216,000 would be “especially harmful in Canada’s current low-growth environment.”

“Incomes from work represent three-quarters of the total taxable income of high-income earners, so any income tax rate hike directly targets wealth-producing taxpayers as employees,” the study said. .

“There is a risk that the impact on total Canadian tax revenue will be negligible or even negative as it will motivate individuals to modify their behavior in the labor market. It may even be tempting to migrate to a country that has a large population, which will affect the future performance of Canadian businesses, which in turn will affect economic growth and the standard of living of its citizens.”

Citing the income tax increase that took place in 2016, the authors conclude that raising the federal income tax rate from 33% to 35% would “negatively impact total tax revenue when federal and state revenues are combined.” would be,” he said.

In 2015, the newly elected Liberal government introduced changes to Canada’s personal income tax system for the 2016 tax year, adding a new income tax bracket that increased the top tax rate from 29% to 33% on income over $200,000. did.

The policy had a significant impact on the Canadian economy, he said. 2020 research From the Fraser Institute.

“The federal government’s changes to the top tax rate in 2016 significantly weakened Canada’s competitive position,” the think tank said.

“In particular, high and increasing marginal tax rates (that is, the tax rate on the next dollar you make) discourage people from engaging in productive economic activity, ultimately stunting economic growth and prosperity. This occurs because marginal tax rates reduce the rewards of earning more, and in the case of personal income taxes, the income of more labor.”