For the Liberals, taxing the rich might be politically popular — and risky

For all the alarm expressed in recent months by some pundits and politicians about government debt, surprisingly little has been said about one readily available option for managing higher public expenditures: asking at least some people to pay more in taxes.

The idea of asking certain people — the richest members of society — to pay more in taxes is broadly popular with the general public. But Justin Trudeau's Liberals have also demonstrated how badly things can go when a government tries to do that. And the greatest potential sources of new revenue are likely beyond this (or any) government's reach right now.

The throne speech offered a broad promise to "identify additional ways to tax extreme wealth inequality" alongside two specific commitments: one to cap the tax deduction available for stock options (a policy the Liberals came close to implementing last year) and another to take on "corporate tax avoidance by digital giants" (the Liberals promised in 2019 to implement a three per cent tax on the advertising revenues of foreign-based online companies like Apple, Google and Facebook).

But the NDP (whose support the Liberals might need if they want to implement any significant changes in the near-term) is calling for a new wealth tax — a one per cent tax on individual and family net worth that exceeds $20 million.

A new paper from the progressive Broadbent Institute goes further by calling for the elimination of tax breaks for capital gains and dividends, a higher top tax bracket, changes to corporate taxes and a post-crisis increase in consumption taxes like the GST.

If raising government revenue was the only consideration, increasing the GST would be the simplest way to do it: an increase of one percentage point has been estimated to be worth approximately $7 billion in revenue. Politically, of course, any increase in the GST would be a heavy burden for any government to carry.

Thirty years of dwindling revenue

No major party in recent memory has been willing to propose a broad increase in taxes for individuals, even as federal revenues have diminished over the past thirty years. As a percentage of Canada's national GDP, federal revenues stood at 15 per cent in 2019.

That was one point higher than in the last full year of Stephen Harper's Conservative government — but still three points lower than where federal revenues stood in 1992, before three decades of tax cuts.

The small increase since 2015 can be attributed to a few Liberal reforms, including a higher personal income tax rate for those earning $200,000 or more. That change was a central element of the Liberal platform in 2015 — part of a commitment to raise taxes on the top one-per cent and provide greater support for the "middle class."

But the Liberals ran into more objections the further they delved into the tax system. First, Conservatives complained about the elimination of several Harper-era tax credits. Then, the fall of 2017 was consumed by a furor over the government's attempt to eliminate loopholes that allowed some wealthy Canadians to accumulate savings at a lower tax rate.

The rollout of those tax reform proposals was clumsy and the Liberals' response to criticism was lackadaisical. What could have been a debate about fairness and inequality was instead framed as an attack on entrepreneurs, family businesses and farmers.

American reprisals

Asking the wealthiest members of society to contribute more to the public accounts has been a central element of the income inequality debate ever since it came to the fore nearly a decade ago — but the Liberals can't assume that whatever they might propose in the months ahead will go any easier than it did last time.

If, for instance, they move ahead with a plan to tax Internet giants, they could raise some $700 million (according to the government's estimate of last year). But they could face an aggressive response from the United States government, which has objected to European proposals to tax the major American-based online companies.

The idea of a wealth tax is already the subject of competing claims. In policy notes for the C.D. Howe Institute, Canadian economists Peter van Dijk and Glen Hodgson pointed out that similar levies were tried and abandoned in Europe.

But Gabriel Zucman and Emmanuel Saez, two U.S.-based economists, have argued that a wealth tax could be made to work by addressing the problems that plagued the European attempts.

Tax avoidance

The Parliamentary Budget Officer has estimated that the NDP's proposal could raise $5.6 billion in the current fiscal year. But that projection comes with a significant caveat:

"A large behavioural response could be expected," the PBO cautioned, and "the magnitude of this response is highly uncertain and dependent on the level of enforcement and the asset valuation techniques prescribed by the legislation."

In other words, wealthy Canadians would adjust their finances to avoid the tax as much as possible, and a lot would depend on how far they were willing to go to do that — and how well the government tracked those efforts.

Alternatively, the Liberals could dust off another campaign commitment from last year — a proposal to implement a 10 per cent luxury tax on the purchase of cars, boats and private aircraft that cost more than $100,000 each. They could also revive their promise of a speculation tax on vacant residential property.

Those two measures, coupled with changes to the stock option deduction, could form the basis of a "tax the rich" counterproposal to the NDP's demand for a wealth tax. But the amount of revenue raised by those measures could be relatively modest. In their 2019 platform, the Liberals predicted they could raise about $600 million annually from the luxury tax and another $250 million from the speculation tax by 2023.

Any new tax is likely to raise complaints from the business and corporate sectors. But would a less sweeping alternative to a wealth tax be enough to win the NDP's support for next spring's budget?

"Anything they're going to do, I fear ... is not going to be enough for the NDP and will continue to [anger] the centre-right. And it won't bring in the revenue that they're expecting, either," said Elliott Hughes, a former policy adviser to former finance minister Bill Morneau.

Challenged by NDP Leader Jagmeet Singh in the House of Commons this week to implement a wealth tax, Finance Minister Chrystia Freeland said only that "we all need to pay our fair share, especially in times of crisis."

That's a defensible position — probably a popular one. And while we're all engaged in a deep debate about what needs to change in a post-pandemic world, there's no reason to exclude tax hikes from the discussion — particularly when revenues at the federal level have seldom been lower.

The hardest part of "building back better" may be figuring out how to raise the ceiling on public revenues.