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A millionaires' tax is all the rage, but it's another thing to collect

Canada was a country of 20 million people in 1964, and a quarter of them (5,301,219) filed tax returns. Of these returns, almost all (5,059,211) reported taxable incomes of less than $10,000. Only 151,904 reported incomes between $10,000 and $15,000; only 43,158 reported incomes between $15,000 and $20,000; only 19,122 reported incomes between $20,000 and $25,000. Only 749 reported incomes of more than $100,000.

Canada was a country of 34 million people in 2008, and half of them (16,945,020) filed tax returns. Of these, more than a third (6,471,600) reported taxable incomes of more than $50,000; and almost 10 per cent (1,412,830) reported taxable incomes greater than $100,000. This was essentially the same number identified as millionaires by the Deloitte Centre for Financial Services. (For the record, Deloitte put the number at 1.7 million.)

Pervasive inflation aside, this upward trend of Canadian incomes is a remarkable achievement – and (assuming that tough times give way once again to prosperity) the best is almost certainly yet to be.

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Canada will be a country of about 38 million in 2020 – when the number of Canadians reporting taxable incomes greater than $100,000 will presumably rise to 2.5 million, or roughly the number of millionaires anticipated by Deloitte. These millionaires will collectively possess investment assets (not counting real estate) of $6.7-trillion – double the current $3.3-trillion.

People who want to tax millionaires aggressively can let their imaginations run wild. A 1-per-cent wealth tax, levied in 2020, could theoretically yield $70-billion, or enough to take care of whatever federal and provincial deficits might still exist. A 4-per-cent wealth tax could theoretically yield $270-billion – or enough to pay the entire cost of operating the federal government this year.

It looks so easy – which is why a "millionaire's tax" is all the rage these days. But it's not as easy to execute as it looks. Franklin Roosevelt's Revenue Act of 1935, known alternatively as the Wealth Tax Act or the Soak the Rich Act, raised top marginal tax rates to 75 per cent on the incomes of millionaires. Predictably, the tax never raised the revenue that the New Dealers anticipated. People simply reported less income – effectively cancelling the tax increase. FDR proved that a wealth tax can work only through ruthless prosecution – and high risk of imprisonment – of the rich.

But depressions are far apart, and people forget. One of the champions of a "millionaire's tax" has been Chicago economist Austan Goolsbee, who chaired Barack Obama's Council of Economic Advisers for a year until he stepped down in August. Yet, back in 1999, Mr. Goolsbee concluded (in a research paper) that "higher marginal tax rates led [in the 1990s]to a significant decline in taxable income." In his study of America's richest million taxpayers, he found that "a small number of executives," by themselves, accounted for 20 per cent of the decline.

Economists Emmanuel Saez (University of California at Berkeley) and Michael Veall (McMaster University) produced the definitive study of income by class in 2003. With a timeline extending from 1920 through 2000, they reached the same conclusion: "The empirical literature on behavioural responses to taxation has shown that taxes can have a substantial impact on income reported for tax purposes."

The U.S. introduced an income tax in 1913, Canada in 1917. Professors Saez and Veall showed that the highest 5 per cent of Canadian income earners held a 10-per-cent share of the country's income in 1920 (when only 5 per cent of people filed tax returns of any kind) – and an identical 10-per-cent share in 2000. What's the fuss? (The top 5 per cent did take a big hit in "income share," dropping to about 8 per cent in the Great Depression, in the Second World War and in the postwar years.)

Some people argue against wealth taxes because they cause successful people to migrate. And they probably do. But it's easier to defer taxable income than to move. Tax gouging is always met by tax avoidance. In the age of keystrokes, as one wit put it, nothing moves faster than a million dollars. As history attests, it's the poor, not the rich, who migrate. When you levy disproportionate taxes on the rich, you serve eviction notices on the poor.

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About the Author
Neil Reynolds

Neil Reynolds is an Ottawa writer whose columns on national economic issues appear in Wednesday's and Friday's Globe and Mail. He is the former editor-in-chief of The Vancouver Sun and the Ottawa Citizen. More

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