It's counterintuitive, but tax the rich, not the poor

Take some money from the wealthy, give it to the poor -- why not do it? Basic accounting suggests that another $1,000 for a student with a $10,000 yearly income puts them further ahead than the same amount does for someone earning $100,000. After all, it gives the student a boost of 10 per cent, and the affluent person only one per cent.

In Canada, the small amount of income redistributed to the poor has long been a matter of public debate. Lately, the poor have been losing. The low-tax, small-government crowd, both Liberal and Conservative, have had control of the federal government for decades.

Today, accepting that the rich should pay a fair share of taxes would constitute progress. Through tax cuts, money is being returned to corporations and the wealthy. Personal tax cuts enacted by the Chrétien Liberals in the 2000 budget put one-third of the benefits in the pockets of the richest five per cent of taxpayers.

Economists can be found arguing that taxing the rich reduces incentives to create wealth. True-believing right-wingers argue that the rich are entitled to whatever money they have, regardless of how that money is used or how it was obtained. Cynics simply observe that through provincial sales taxes and the GST, it is possible to soak the poor, always more numerous than the rich.

With greed being presented as a virtue, even the idea that all individuals benefit from redistributing resources through taxation to provide education, health care, recreation, and access to cultural activities for the entire population can seem counterintuitive. Yet the principle that each should contribute to society according to ability to pay retains its power.

Whoever knows financial success already reaps more material benefits than others, and should be called upon to contribute accordingly. Wealth and high income confer rewards; such resources provide the fortunate a greater responsibility for collective endeavours.   

The publication of Capital in the Twenty-First Century by Thomas Piketty adds an important policy option to the "make the rich pay" side of the debate: a wealth tax. Instead of just taxing extra income, Piketty wants to see capital assets taxed. Stocks, bonds, ownership shares and property should be subject to worldwide levy, Piketty argues.

Though North American super salaries, stock options and bonuses have catapulted (mainly) financial executives into the top 1% of wealth holders, most wealth is inherited. Canada once had an inheritance tax, but it was abolished years ago. Now estates pass on to next of kin subject only to tax on capital gains, while in many other countries death duties apply.

For all wealth holders, capital gains (valued at only 50 per cent of their total worth for tax purposes) are taxable, but not the underlying assets, except for homes and commercial property, which are subject to yearly taxes. In fact, the existence of the property tax suggests that financial assets have an unfair favourable treatment compared to real property, and should be taxed yearly. 

Income on wealth is taxed, often at more favourable rates than salary income. In Canada for instance, dividends on stocks are taxed at a preferential rate.

There is no shortage of ideas of how to use new taxes to redistribute income. Since 1972 when it was first proposed by the late Nobel Prize economist James Tobin, the Tobin Tax -- a small fee that could be charged on foreign currency trades -- has been widely discussed and debated.

The foreign exchange (FX) market measured over $5 trillion per day in 2013. It far outstrips international trade which measures in mere billions of dollars per year.

Most FX trades are speculative -- money traded to make money -- unconnected to trade in real goods or services. Making trades more expensive by taxing them would serve to reduce foreign currency speculation and calm movements in exchange rates, a good thing in itself. Tobin wanted the tax to fund international institutions and further economic development.

The Financial Transactions Tax (FTT) is a close cousin to the Tobin Tax. A levy on the purchase of financial instruments, such as stocks and bonds, was initially proposed in 1997 by then editor of Le Monde diplomatique, Ignacio Ramonet.

After years of discussion and without reaching full agreement, 11 countries of the European Union are moving to introduce a FTT on January 1, 2016.

In 2010, prior to the G8/G20 meetings in Ontario, France and the U.K. pushed for a special bank tax, if only as an insurance measure, so as to fund the next bank bailout. Host Stephen Harper found allies and fought off the proposal.

Not all new tax ideas aim to redistribute income from rich to poor. The Ecofiscal Commission headed by Chris Ragan of McGill University wants to introduce "green" consumption taxes and reduce income taxes.

Replacing progressive taxation where the rich pay more, with regressive taxes which all would pay regardless of income, is being sold as an environmental policy.

The policy option with the most promise is clamping down on tax havens. Canadians for Tax Fairness estimate that $7.8 billion could be added to tax revenue simply by applying existing laws to money stashed outside the country.

Getting serious about ending tax evasion means working with other countries. The next Canadian government needs to lead an international effort to eliminate tax advantages inherent in shipping assets offshore, and hiding income in shell companies.

Duncan Cameron is the president of rabble.ca and writes a weekly column on politics and current affairs.

Photo: Eric L/flickr

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