Should we be taxing the rich 1% more?
The federal Liberal Party's recent election promise to create a new tax bracket for rich Canadians has been quickly decried by - well, rich Canadians. But is it an appropriate and sensible approach to fiscal policy? The answer is unequivocal: yes.
Understandably, Conservatives have been equally quick to denounce the proposal, calling it 'Trudeau's tax.'
Mr. Trudeau should not shy away from this epithet, but rather wear it proudly.
His idea is a far better and more balanced approach to fiscal policy than the Conservative's overly-complex boutique tax breaks, tailor-made for specific voters, which apply to a few, wealthy Canadians.
There is considerable research on the economic benefits of raising taxes on the richest one per cent of Canadians. Many may choose to ignore research, but the empirical evidence is difficult to cast aside.
For instance, the Washington-based Economic Policy Institute has shown that raising taxes does not impede economic growth. In fact, reducing taxes on the rich has had no statistically significant impact on growth.
Even the International Monetary Fund is now believes that the large income differences between the poor and rich should be reduced to encourage growth.
Lawrence Summers, former economic advisor to President Obama and U.S. Treasury Secretary from 1999 to 2001, agrees.
Taxing the rich good for the economy
I would go even further, however, and argue that it does even more than that: higher taxes on the one per cent actually contribute to greater economic growth.
Increasing taxes on the rich and reducing them on middle-class Canadians will actually contribute to higher consumption levels, leading to more growth.
This is why the discussion on income distribution that is taking place around the world is so fundamental to our well-being. It is the skewed income distribution of the last three decades that is also, in part, responsible for the lower rates of growth today and the economic and financial crisis.
In other words, Trudeau's tax is actually good economics.
First, Michel Kelly-Gagnon, president and CEO of the Montreal Economic Institute, recently argued that 'rich Canadians sign paychecks.'
The implication is that because of their high incomes, rich Canadians create jobs. Raising their taxes will contribute to job losses.
This is a ridiculous argument, of course. Individual rich Canadians do not hire and pay workers out of their own income.
Naysayers suffer from 'historical anmesia'
Raising personal income taxes on higher-income Canadians will not have an impact on employment and will not create unemployment.
Moreover, those who predict doom and gloom if we raise taxes on the one per cent are suffering from historical amnesia.
Marginal tax rates in Canada were once much higher.
Did this lead to mass unemployment? Of course not. The period between 1945 and 1980 was one of the best in our history.
Compared to the last three decades, we had on average lower unemployment and higher growth rates. How can we believe now that raising taxes will be detrimental the economy?
The facts simply don't add up.
So those naysayers must reconcile their arguments with the facts of history.
Second, there has also been some mention of a hypothetical 'psychological threshold' of 50 per cent, above which, we are told, tax rates should never climb, as it would either fail to attract international private sector talent or lead to increased tax avoidance.
With respect to the talent, I always found this argument somewhat condescending.
There are a great many very talented Canadians qualified to lead our industries and institutions.
As for the argument about tax avoidance, is it not the government's responsibility to ensure this does not happen by implementing the necessary and appropriate regulations? This can be done easily, so there are no reasons to believe this will be a problem, unless the government deliberately does not want to address the issue.
In the end, it is difficult to argue against the facts of history. They are there for everyone to see. Raising the tax rate on the one per cent is a sensible policy.
In October, Canadians will have a clear alternative between a broad-based tax policy that benefits a great many Canadians and our economy, and one that benefits a few, rich Canadians. Either way, the election campaign just got more interesting.
Louis-Philippe Rochon is an associate professor of economics at Ontario's Laurentian University and founding co-editor of the Review of Keynesian Economics.