Source: National Post
A C.D. Howe Institute report pokes a big hole in the pleasant notion that raising taxes on rich people is the easiest, most effective and most equitable way to fill up a depleting tax treasury.
As much as it may leave Occupy protesters and NDP leaders feeling good about themselves, it’s bad for revenue, the report says. In fact, a new wealth tax in Ontario, to take effect in July, will not raise anywhere near the revenue projected, and will cost the country dearly within a few years.
Alexandre Laurin, author of the report, notes that the ease with which high-income earners can adopt strategies to reduce their taxable income means the new levy will probably be applied to a smaller pool than anticipated by New Democratic Party leader Andrea Horwath when she strongarmed Dalton McGuinty’s minority government into adopting it, in return for allowing the Liberals’ budget to pass.
The government hoped the new tax — an extra 2% on incomes over $500,000, which translates into a 3.1% increase when an additional surtax is applied — would raise $470 million. Laurin estimates the number will be closer to $450 million initially, falling to zero by 2019 as wealthy taxpayers adjust, and a net loss of $200 million by 2027.
Ottawa will also be affected by the expected tax-reduction strategies, producing a combined revenue loss of about $800 million a year a decade from now, according to the report.
Laurin notes that Ontario already redistributes taxes from rich to poor more extensively than most other provinces. “The top 1% of earners shoulder more than one-quarter of all income taxes, while the bottom 75% shoulder about 12%,” he writes. The share of taxes paid by the wealthiest earners is more than double their share of taxable income, while the top 10% pay two-thirds of all net income taxes.
The difficulty in grasping this appears to arise from the general level of financial illiteracy that pervades much of the population, the same limited grasp of basic economics that fuels a society deep in debt and willing to pay usurious rates of interest on credit card debt, as long as they can handle the monthly payment. It’s a weakness shared across geographical and social lines, and seems to pervade New Democrats and their adherents. The simple notion that rich people should pay more sells well, if you assume the government can simply raise the rates and happy millionaires will fork over the cash. But that’s generally not what happens: there are plenty of legal and wholly ethical ways to reduce the share of income that’s exposed to tax, and the higher the rate, the greater the motive there is to do so. That’s why jurisdictions that once levied draconian levels of taxation — at one time Britain’s marginal rate could reach 98% — eventually reduced them, finding they just didn’t work.
But each generation has to learn anew, and some never do. Sitting around a park with your Occupy buddies, moaning about the raw deal society has dealt you, it’s easy to agree that higher taxes on other people are both necessary and just. It’s also easy to agree that capitalism is bad and a society ruled by freebies would be much better. And it probably would be, if it worked. But it doesn’t. Just like higher taxes.