Inheritance taxes could create warped incentives and be ineffective at dispelling inequality
Citing figures on the country’s wealth distribution from Statistics Canada, a recent report from the Canadian Centre for Policy Alternatives (CCPA) contended that estate taxes should be enacted to prevent the majority of Canada’s wealth from staying in the hands of a few families. But the leader of a taxpayer advocacy group argues that it’s not that simple.
According to Aaron Wudrick, federal director of the Canadian Taxpayers Federation, wealthy families don’t stay wealthy across generations just because they bequeath their estates.
“Indeed, even the CCPA study shows that in 2016, nearly half of Canada's 87 richest families weren't heirs to a fortune,” Wudrick wrote in the Huffington Post. By the third generation, only 18% of the ultra-rich are recipients of vast fortunes.
Wudrick added that death taxes would effectively be a form of double taxation for its eventual targets. Because they penalize delayed consumption by taxing it at a much higher rate than current consumption, he said, they create a strong incentive against long-term saving and investment. The long-term societal impact, he argued, would be decreased economic growth, less job creation, and slower improvement in living standards for all.
Pointing to the US, he noted that inheritance taxes push wealthy families toward aggressive estate planning, which leads to wealth being allocated in less efficient ways. Because wealthy individuals have been getting better at finding legal loopholes to shelter their wealth, Wudrick said, the share of total government revenues raised through estate taxes among OECD countries has been declining since the 1960s.
And while the CCPA report correctly tagged Canada as the only G7 country without a death tax, he said a broader analysis shows a global trend toward scrapping the measure. “Australia and Norway abolished theirs in 1979 and 2014, respectively,” he wrote. “Sweden did away with its death tax in 2004, which at its peak had been set at an eye-watering 70 per cent, and had been causing many wealthy Swedes to leave the country altogether simply to avoid high taxes.”
Even after its abolition of estate taxes, Sweden is still a relatively egalitarian country, added Wudrick, while the US and the UK are still higher on the inequality scale than estate-tax-free Australia, Norway, and Canada.
“[W]hatever their superficial appeal, death taxes are a bad way to raise revenue, while causing major, detrimental side effects,” he said. “Canadian policymakers should ensure they stay buried for good.”
