Does Canada benefit from attracting wealthy tax dodgers to invest in local business while enjoying the low tax rates of the “Switzerland of the North?” A story by Macleans business writer Jason Kirby this week argues that Canada should avoid the urge to tax the wealthy because these “Golden Geese” bring with them innumerable economic benefits. The article highlights how Canada’s comparatively low personal and corporate income tax rates, combined with its lack of inheritance or gift taxes, appeal to those super-rich who are tired of paying higher taxes elsewhere.
But while Macleans is singing the praises of low taxes for the high income, other business voices are sounding a message of concern about growing income inequality. In January, the Risk Report of the World Economic Forum called increasing wealth and income disparities a significant concern, linking the rising disparity to the evolution of most other global risks. Min Zhu, a special advisor to the Director of the International Monetary Fund, told the Forum’s gathering in Davos that “The increase in inequality is the most serious challenge for the world.”
Last week, a report by the business-funded think tank the Conference Board of Canada detailed rising income inequality in Canada over the past thirty years. The Conference Board highlighted the impact of rising inequality on economic growth and social cohesion, noting that failure to use the skills of all its citizens can undermine a country’s economic growth. The report is part of a project funded by 24 Canadian businesses (and two provincial government departments or agencies), including the corporate giants Bell Canada, Scotiabank and TD Bank Financial Group.
These business elites are responding to the fundamental connection between income inequality and economic growth. Not only can inequality undermine economic growth through lowered productivity, it is also associated with higher health care costs, lower life expectancy, greater crime, worse educational outcomes, higher rates of mental illness, more illegal drug use and higher rates of teen pregnancy.
In spite of the economic benefits the Macleans article expects will accompany a flood of wealthy newcomers to Canada, greater income inequality can actually bring more economic instability. While average working Canadians invest their income in cars, houses, and local university tuition, all of which benefits the local economy, the wealthy spend a greater portion of their income on financial speculation. As the 2008-09 recession demonstrates, financial speculation can have disastrous impacts on the global economy and destroy the income of average working Canadians.
Loss of social cohesion due to rampant inequality can also threaten the political and economic system. Why should the poor – and increasingly the middle-class – continue to support a system that has failed them? Why should they agree to endless sacrifices in the pursuit of economic growth that never trickles down? If rising inequality creates enough people who are excluded from the system and have no stake in its future, then the system itself is at stake. As Joseph Stiglitz notes, gross inequality led to the protests that toppled governments in the recent Arab spring. If it could happen there, why not in North America?
Of course, none of this might seem of interest to the wealthy tax dodgers we are supposed to be welcoming. Doesn’t their wealth insulate them from all these consequences? Actually, no. The evidence suggests that these negative outcomes are higher at every income level of a less equal society when compared with a more equal society. Paying for the best doctors and the best teachers and the best security guards can’t inoculate the rich from the pernicious effects of inequality. Ultimately, the well-being of the rich is intimately connected to the well-being of the society that surrounds them.
For this reason, it is foolish to suggest that the rich should not be taxed in order to encourage them to come and stay. The same tax reforms that are attracting wealthy tax dodgers have contributed to the rise of inequality in Canada. A study by the Organisation for Economic Cooperation and Development found that tax cuts in Canada between 2000 and 2006 mainly benefited high income groups. Tax cuts since 2006 have followed the same pattern.
In fact, a study of tax incidence by Marc Lee of the Canadian Centre for Policy Alternatives found that the rich are now paying a smaller proportion of their income in taxes than the poor. Tax changes of the past two decades have changed Canada’s formerly progressive tax system into an inverted u-shape, in which the middle class pays the highest tax rate.
There are those who argue that Canada’s tax system should be flat, with everyone paying the same percentage of their income in taxes. But there can be no moral argument made for a regressive tax system that taxes the middle class and the poor more than the rich. And the evidence on inequality suggests that such a system is to no one’s benefit.
On the contrary, a progressive income tax system that funds adequate public services for all Canadians and reduces market income inequality is to everyone’s benefit. And for that to happen, the wealthy need to pay their fair share.