During an election campaign, there are few things that give a left-wing politician greater joy and pleasure than to talk about taxing the rich.
Income inequality is a serious problem in society. For the political left, it is a “Robin Hood” virtue to take money from the wealthy and give it to those who have less.
When a politician promises to raise taxes on the rich, it is often described as paying their “fair share” or giving “a little bit more.” However, sometimes raising taxes on the rich can result in less tax revenue for the government.
Case in point: During the 2015 federal election, Justin Trudeau unveiled his plan to raise taxes on wealthy Canadians, but things didn’t turn out as planned.
Trudeau promised to create a new tax bracket of 33% on Canadians who earn more than $200,000 a year. Unlike his promise to balance the budget in 2019-20, this was a promise he kept.
The new tax rate took effect January 1, 2016. The Liberal party platform said it would result in 2.8 billion dollars in additional revenue.
That prediction did not come true. Here are the actual numbers:
|Fiscal Year||Personal income tax revenues|
Instead of yielding 2.8 billion more in revenue, the government received 1.2 billion less! What’s more, high-income Canadians (earning more than $140,000 a year) paid 4.6 billion less in taxes.
When a politician says that taxing the rich will result in more money for the government, their prediction often proves false due to static tax analysis. With static tax analysis, it is presumed that a higher tax rate will not produce any behavioral changes in taxpayers.
Unfortunately, static tax analysis does not accurately predict tax revenues when it comes to taxing the rich. They take action to avoid paying higher taxes. It’s one reason why they are rich.
According to the Department of Finance, one way high-income Canadians paid less taxes was to “recognize income [capital gains and dividends] in the 2015 tax year before the new 33 per cent tax rate came into effect in 2016.”
Another way the rich avoid paying higher taxes is to pack up and leave. That’s what happened when France imposed a wealth tax on the rich. Over 12,000 millionaires left the country!
Taxing the rich is like trying to catch a fish with your bare hands. Just when you think you have your lunch, the fish slips right out of your fingers.
Hence, the best way to tax the wealthy is not necessarily by raising taxes, but by having a rate that is competitive with other countries, states or provinces.
Undoubtedly, this creates a “race to the bottom” in tax rates; however, until world leaders all agree to tax the rich at the same rates, it is an economic reality. When governments raise taxes on the wealthy too much, they risk collecting less tax revenue.
Image Credit: https://www.flickr.com/photos/djetlp/14065721351/
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