It is the case that folks seriously interested in transforming society seldom consider achieving their objectives through changes in the tax system. Nevertheless, tax reform should be on the agenda of all those who want to change the world in more modest ways. The two important functions of the tax system in a flourishing democracy are to raise revenue to fund government programs and to redistribute income and wealth. The Canadian tax system fails dismally in achieving both of these objectives.
Over the past two decades, governments in a number of Western industrialized countries have attempted a political initiative of enormous consequences a deliberate and sustained attempt to redistribute income and wealth from the poor and the middle class to the rich. They have been successful. Every measure shows that, while the income of the typical family has stagnated over the past two decades, the rich have been getting richer. From 1984 to 2005, only the top ten per cent of families increased their share of national wealth. In 1980, the top one per cent of income earners received 7.6 per cent of the personal income earned in Canada; by 2000, they received 13.6 per cent.
What Can Be Done?
There is compelling evidence that the tax system can be used to reduce inequalities. In the early part of the twentieth century the share of national income going to the top one per cent was about fifteen per cent. Following the Great Depression and WWII, their share slipped to about eleven per cent. But and this is an interesting fact from 1945 to 1980 their share continued to decline, to only about to 7.5 per cent. Thus, during the 1950s and 1960s, a period of low rates of unemployment and high rates of economic growth, Canadian society was also becoming more equal.
What caused the decline in inequality throughout this period? In part, at least, it was due to the progressive tax system. During this period, Canada had a wealth tax and the top income-tax rate exceeded eighty per cent. This period is referred to as the “good old days” by progressive tax reformers. Wealth taxes were abolished in 1969 and, over the last couple of decades, the income tax has become increasingly less progressive. The top rate is now about 45 per cent (only 39 per cent in Alberta), and the system is riddled with concessions for those earning income from capital.
Here is a short list of progressive reforms:
Increase taxes on the filthy rich by raising the top marginal tax rates and tying them to some measure of inequality.
At present, the top marginal tax rate kicks in at about $120,000 of income. Two additional rates say 55 per cent and 65 per cent, to start could apply to income that was fifteen times and thirty times the median earned income. So, if the median earned income were $30,000, these rates would begin to apply at $450,000 and $900,000. Then these rates would increase (or decrease) with changes in some measure of inequality. Surely, everyone would agree that someone earning over thirty times as much as the typical worker has a weak moral claim to the income the market throws up, and, if inequality is increasing, that claim is weakened even further.
Include gifts and inheritances over $3 million in taxable income.
Inequality in the distribution of wealth is even more unequal than the distribution of income, and is becoming dramatically more unequal. Yet, Canada has no tax on the transfer of wealth. The Canadian plutocracy can pass their wealth, and the power that entails, to the next generation of plutocrats, tax-free. The fact that there is complete absence of discussion about the enactment of a wealth tax in Canada is an indication of how thoroughly business interests set the public-policy agenda. But instead of imposing a wealth transfer tax, or so-called “death tax,” gifts and inheritances over some fairly large amount, say $3 million, should simply be included in the income of the recipient for income tax purposes. Inheritances would be then treated the same as earned income. Why should minimum-wage workers pay tax on the income they earn, while those who by the accident of birth stand to receive multi-million-dollar inheritances pay nothing?
Enact an annual wealth tax.
Because wealth yields economic security, prestige and power, it should be taxed along with income to equalize the sacrifice individuals have to make in support of collective goods and services. Basically, every individual with wealth holdings of over $3 million, say, should have to pay a one-per-cent tax on the fair market value of their wealth each year. This is a common tax in many European countries.
Some will argue that wealth taxes are hard to administer and unfair because they might require some taxpayers to liquidate some of their holdings in order to pay the tax. These arguments are unpersuasive. Consider what little concern is shown for these considerations when it is the assets of the economically weak that are being considered. When workers lose their jobs and have exhausted their Employment Insurance benefits, before they can qualify for social assistance they must value all their assets (except their homes) and systematically liquidate them, until they have only assets valued (in some provinces) at less than one month’s entitlement to general welfare assistance.
Close the loopholes for the rich that now riddle the income-tax system.
All of these loopholes should be removed, including, for example (as an illustration of how far I would go with this), the tax credit for charitable donations. The only thing more offensive than not requiring the rich to pay their fair share of tax is allowing them to direct where and on what government money is spent and that, of course, is exactly what the tax credit for charitable contributions does. It allows high-income individuals, in the main, to direct the spending of hundreds of millions of dollars of government money in a way over which the government nor anyone else has any control, for which there is no public accountability, that is not transparent, and which allows them to buy public monuments and recognition for themselves and to give legitimacy to their social indifference. The medical-expense credit should also be repealed. It provides an enormous subsidy for rich people who jump the healthcare queue in Canada and receive medical services in the U.S.
Extend the corporate income tax to all business enterprises and require them to publicly disclose their tax returns.
Corporations around the world have been making lap dogs out of governments. In Canada, the government lost billions of dollars though the income-trust fiasco. Clearly all business enterprises should pay the same tax no matter what kind of legal entity they use to carry on their business. Many measures have to be taken to ensure that corporations pay tax on their worldwide profits; however, a good place to start would be to make the tax returns of corporations over a certain size into public documents. In this way the public could see precisely how much tax they were paying or not paying.
Inequality in the distribution of economic resources is Canada’s most serious social and economic problem. The tax system alone cannot reverse the effects of two decades of unrelenting effort to completely liberate private greed and to constrain democratic decision-making, but we should begin a serious and reality-based discussion of what can be achieved.
This article appeared in the March/April 2007 issue of Canadian Dimension (Standing Our Ground).