Canada’s mainstream conservative biz paper The Financial Post recently published The NDP’s new tax-the-rich plan is terrible, even by their standards and it is stuffed with white-hot stupidity and bad arithmetic. Arguing against any given tax is sane — that’s what conservatives are for, innit? — but if they’re going to use math that would get you an “F” in Grade 8, they deserve a whack with the cluestick.
Here’s a Post out-take:
The proposal is for an annual one per cent tax on wealth over $20 million. This means that if an Ontario resident to whom this tax applies invests $100,000 in a 1.5 per cent GIC for one year (about the rate currently offered by big banks), he or she will earn a $1,500 nominal return on which will be owed $1,833 in tax — $833 in income tax, including the higher top marginal income tax rate, plus another $1,000 for the wealth tax.
The effective tax rate on the GIC return is 122 per cent, which is what the NDP now calls “tax fairness.”
Let’s enumerate some facts:
Canada has a reasonably-typical developed-world tax regime; in the top income bracket, you pay a little over 50% in tax.
Wealthy people do not put their money in 1.5% GICs, they pay investment professionals to manage it. Typically, the wealthier they are, the better returns they can get because they can hire better money managers. (There’s interesting data on this in Piketty.) Let’s say they’re going to realize 4% or so, because in fact most wealthy people do better than that. I’m a one-percenter but nowhere near the hypothetical twenty-millioner in the narrative, and I do better.
A little arithmetic reveals that Mr $20M will pull in about $800K in investment income, $400K net after tax. Actually, he’ll do better because some investment income will be capital gains, taxed at half the rate, and he’ll probably do better than 4% too. But then there’s the 1% wealth tax, so subtract that for a worst-case net income of $200K if he refuses to spend any of his capital.
Now, people with that kind of money usually have other wealth-generating activities (how else did they get there?), which is on top of the $200K. Until they retire. The conventional wisdom says that a retiree can extract 4-5% of their capital per annum, which for this person would be pushing a million, except for there are lots of tax dodges open to retirees, so while they’d still be stuck with the $200K wealth tax, they could keep more of that million.
So, the things that were wrong about that $100K-deposit story:
It’s completely bogus to combine the wealth tax and the income tax and say it’s “on the GIC return”. I’d say “Data fail” but that’s too kind; the 122% figure is a filthy, stinking lie.
And anyhow, the whole scenario is science fiction, the “$20 million” part just doesn’t go with the “$100K GIC” part. If a conservative advocating lower taxes has to resort to this kind of specious bullshit, you have to wonder if it’s because they can’t find better arguments.
Take-away · I think a small wealth tax, maybe starting in the low-double-digit millions, is a fine idea. I think that people subject to it will in practice remain extremely affluent. Their fortune would erode slowly over the years — having trouble seeing what’s wrong with that — but there’ll be plenty left to give their kids’ careers a rocket boost.
It’s perfectly reasonable to disagree with me. But if you’re going to resort to numerical flummery I’m going to think just you’re a greedy asshole with no intellectual legs to stand on.