Lack of inheritance tax is making inequality worse, think-tank study suggests

The gap between the haves and the have-nots is getting wider in Canada — and the country's lack of an inheritance tax is a big reason why, according to a new report from the left-leaning think-tank Canadian Centre for Policy Alternatives.

In a report released Tuesday, CCPA economist David Macdonald looked at inequalities in wealth between those on the extreme high end in Canada and everybody else.

Similar reports have tended to focus on income inequality — the gap between what different people make every year. But Macdonald chose instead to focus on wealth inequality — the difference between what they are worth.

The 87 wealthiest families in Canada owned a collective $259 billion at the end of last year, or just shy of $3 billion apiece, Macdonald said. According to Statistics Canada data, that figure has increased by $850 million between 2012 and 2016 — a jump of 37 per cent.

Add it all up and that's "about what everyone in Newfoundland and Labrador, Prince Edward Island and New Brunswick collectively owns," Macdonald said.

He contrasted that with the numbers for the median Canadian family, which saw its net worth increase by just 15 per cent over the same time period — rising to $295,100 from $257,200.

Wealth accumulated 'over generations'

While the group of super-rich would no doubt contain a large number of high earners, Macdonald says they are even more disproportionately made up of people who inherited much of their wealth.

While slightly less than half of Canada's super-rich were self-made, creating businesses that came to be worth hundreds of millions, the remainder inherited much of their wealth, before they themselves were able to grow it.

According to the CCPA, one solution to that growing gulf that Canadian policy-makers have so far been unwilling to explore is to implement an inheritance tax — a one-time fee that an heir would pay upon receiving an inheritance, typically paid out of the estate before it is handed down.

While there are various probate fees and capital gains taxes that can be levied when someone inherits real estate or other investments, Canada has no formal inheritance tax at the federal or provincial levels.

That makes the country one of 15 OECD member-nations that has no such tax, while countries such as the United States, the U.K., France, Japan and South Korea all take up to 40 per cent or more, of large inheritances. 

Some sort of inheritance tax in Canada would be one of the most effective ways of combating inequality, Macdonald says, since it would target only the very rich and only assets that are, for the most part, not filtering through the broader economy.

"A family's stock of wealth can accumulate not just over a single lifetime, but over generations, through inheritance, which further widens whatever income gaps may have existed on an annual basis," Macdonald said.

By his math, if Canada were to implement a 45 per cent tax on inheritances of $5 million or more, it would add $2 billion a year to government coffers.

"You'd expect Canada's tax regime would try to counteract this concentration of wealth at the very top, where it's needed the least. But in fact, federal policies encourage it."

Other ways to level the playing field?

Of course, that's not a universal view. Harvard economics professor Greg Mankiw has written extensively on inheritance taxes and says that keeping the tax on inheritances low or non-existent is the best way of encouraging investment, which boosts the economy and grows wages and government revenues over the long haul.

"It is a good rule of thumb that when you tax an activity, you get less of it," Mankiw wrote in one of his many published papers on the subject. "If we stopped taxing estates, estate-building would be more attractive, and that would be good for everyone in the economy."

"The repeal of the estate tax would stimulate growth and raise incomes for everyone, even those who never receive a bequest," Mankiw writes in another paper.

If evening out wealth inequality is the goal, Mankiw suggests consumption taxes — where people are taxed every time they buy something — is a better way of levelling the playing field.

But Macdonald is unconvinced. In addition to implementing what he calls a "modest" inheritance tax, the CCPA report advocates overhauling how the government treats capital gains and dividend income — two tax advantages that are disproportionately used by wealthy people.

"Eliminating the 50 per cent tax break for capital gains and the 25 per cent tax break on dividends would raise $11 billion and $5 billion annually while almost exclusively targeting Canada's highest earners," Macdonald says.