The urgent need to tax billionaires out of existence

August 23, 2021

A wealth tax would raise badly-needed revenue. More importantly, it could reduce the fortunes—and power—of billionaires

In 2008, just after the election of Barack Obama, the two of us were trying to peddle an idea for a book decrying the rise of billionaires. A New York publisher told us he loved our proposal but it came too late. With Obama’s election, he said, the super-rich would soon be hit by steep taxes that would start depleting their fortunes. Their day in the sun was done.

The publisher apparently wasn’t acquainted with the first law of taxes—that the rich will fight a tax increase as fiercely and ruthlessly as Donald Trump will fight an election loss. The only difference is that the rich don’t settle for clown shows. They hire top lawyers and win.

And so they have—to the detriment of all of us.

One of the most profound changes over the past 40 years has been the ever-increasing concentration of wealth in the hands of a tiny number of individuals who control an ever-rising percentage of the world’s limited resources. As their share of the world’s wealth has risen to incomprehensible levels, so too has their power over us, effectively nullifying democracy and threatening the very livability of the planet.

This increasing dominance of billionaires—and how it renders us powerless to protect ourselves in the most basic ways—should be front and centre in the current federal election campaign. Instead it’s barely even identified as an issue.

The New Democratic Party, alone among our federal political parties, has called for an annual net wealth tax, which would apply exclusively to people with assets worth $10 million or more. Such a tax could raise $10 billion a year, thereby helping to fund social programs and making our tax system fairer. Those are both very important goals. But there’s another even more compelling reason for a wealth tax: to prevent wealthy interests from becoming so powerful they effectively have veto power over the will of the people.

The point is easily illustrated by the crucial issue of climate change. A majority of Canadians now consider global warming an emergency requiring serious action. But the colossally rich and powerful fossil fuel industry opposes such action. Hence, Justin Trudeau talks earnestly about tackling climate change, but his government doesn’t do what’s necessary to actually reduce emissions. In fact, it spends billions of dollars buying and expanding the Trans Mountain pipeline so that the fossil fuel industry can increase its output from the oilsands. As a result, Canada’s emissions continue to grow, depriving Canadians of the opportunity to protect ourselves against a harrowing future of intense heat, fires, droughts and floods.

 

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The notion that billionaires effectively control key aspects of the political agenda, in ways that profoundly affect our lives and our futures, would be repulsive to most Canadians. However, the political domination of the super-rich is a reality, even if it’s rarely discussed or even acknowledged in the mainstream media.

And it’s the elephant in the room of our current election campaign, where there’s some discussion of climate change and other looming environmental disasters, but almost no discussion of what’s blocking action on these vital fronts. Although the dominance of billionaires greatly limits our political options, it’s a subject that is almost entirely missing from the election campaign.

 

This is partly because the billionaire class exerts its political influence in ways that are hard to see.

 

The super-rich don’t have one, single lever that gives them political influence; rather their influence is pervasive and often invisible. Their enormous wealth enables them to disproportionately influence virtually every variable that determines political outcomes.

Here’s just a partial list of how they influence politics: their control over investments that create jobs ensures them a privileged position in negotiating with government; their control over the major institutions through which the public’s opinions are formed and mediated such as policy planning organizations, think tanks, and trade and industrial organizations; their ownership of the mass media, which most citizens depend on for information and analysis about public policies and which overwhelmingly reflect the interests of business and the wealthy; their hiring of an army of PR consultants to mislead the public about their intentions, and lobbyists to influence legislative results; their ability to hold out the promise of high-paying jobs in their companies and on their boards to politicians and civil servants who further their agenda while in office; and, their personal access through social connections to politicians so that political leaders are always acutely aware of their views and concerns, a form of cognitive capture.

We didn’t even mention the most obvious method of influence—financial contributions to political campaigns—because such contributions are well-known and public, and are at least partly governed by rules.

But as the list above shows, there are so many other less visible (but highly effective) ways that the super-rich influence political decision-making. It would be possible to try to cut off some of these avenues of influence through regulation. But the task of devising meaningful rules with sufficient teeth would be mammoth, and any new rules would almost certainly be blocked or whittled down by lobbyists.

The only effective way to reduce the influence of the billionaires is to get to the root of the problem—by reducing their wealth.

 

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The sheer amount of wealth now owned by billionaires is so staggering it defies imagination. Just eight men own more wealth than half of the world’s population (over 3.5 billion people), as Oxfam reported a couple of years ago. Such wealth juxtapositions between billionaires and the rest of the world get more out of control, and obscene, all the time. And yet we’re supposed to believe that nothing needs to be done about it. Will it still be OK then when two or three men own virtually all of the wealth in the world, in addition to controlling outer space?

Forbes, the American business magazine, started publishing an annual list of the world’s billionaires in 1987. In that year, the magazine counted 140 billionaires worldwide with an estimated total worth of US$295 billion. Thirty-five years later, in 2021, it counted 2,755 billionaires around the world worth a staggering $13.1 trillion, an amount equal to about 15 percent of global gross domestic product.

And, in this era when the b-word is tossed around freely, let’s not forget how many dollars it actually takes to make a billion. If you were to receive a dollar every second, 24 hours a day, it would take you 12 days to become a millionaire. But to become a billionaire, you’d have to keep up that pace, receiving a dollar every second, 24 hour a day, for a staggering 32 years.

 

 

And of course, a mere uni-billionaire barely turns heads on a beach anymore. The wealthiest billionaires (like Jeff Bezos and Elon Musk) now have more than $180 billion each. To be in that league, you’d have to have received a dollar every second, 24 hours a day for more than 5,000 years—since the early part of the Bronze Age, not that long after humans lived in caves.

Fast forward to the current pandemic, when so many people have lost their jobs or suffered debilitating illness, yet the wealth of billionaires has risen to stupefying heights. Worldwide, billionaire wealth rose by $5 trillion (to $13.1 trillion) over a 12-month period, by far the most dramatic increase in recorded history.

The wealth of Canada’s top 44 billionaires surged by more than $50 billion during the pandemic. The very wealthiest, David Thomson, increased his holdings by almost $25 billion. Meanwhile, over the same time period, the average Canadian worker earned a salary of about $70,000, if they were fortunate enough to retain a job.

David Thomson’s income during the pandemic was 342,000 times greater than what the average Canadian earned over the same period. Did Thomson, who inherited control of his media empire, work 342,000 times as hard as the average Canadian? Is he 342,000 times smarter? Did he make sacrifices that were 342,000 times greater? What conceivable principle of distributive justice—or any other kind of justice—could possibly justify such a gap?

 

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In fact, there are still some commentators trying to make the case that such enormous hoarding of resources is justified.

We maintain, on the contrary, that the immense concentration of wealth and income today is not due to economic imperatives but to political decisions; that no economic or other purpose is served by allowing a small number of individuals to capture a grotesquely disproportionate share of national wealth; that those who have been able to accumulate these obscene amounts have no moral claim to their gigantic fortunes; that the super-rich are not uniquely talented wealth creators but instead most are mostly greedy and ruthless manipulators who through sheer luck, monopoly power, the opportunity to exploit accumulated knowledge, and often outright dishonesty, have managed to position themselves to capture resources that should belong to others; that allowing a growing concentration of income and wealth among the ultra-rich has significant social, political and economic costs; that there is no conflict between reducing this concentration of wealth and increasing the prosperity of everyone else; and, that the tax system is an appropriate and necessary policy instrument for reducing this ridiculously large gap between the ultra-rich and everyone else.

 

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The tax system at present does nothing to prevent the accumulation of vast wealth. The inadequacy of the income tax for making the ultra-rich pay their fair share was starkly revealed earlier this year in a report published by ProPublica, an American investigative news organization. Based on income tax returns provided by an anonymous source, the report revealed in detail that the wealthiest Americans paid little or no tax even while their wealth continued to grow at an astounding rate.

The report compared how much tax the 25 richest Americans paid each year from 2014 to 2018 to how much Forbes estimated their wealth grew over the same period. In some of those years, while their wealth was doubling and tripling, Jeff Bezos, Michael Bloomberg, Carl Icahn, George Soros, Warren Buffet, and Elon Musk, among the wealthiest men in the world, paid no income tax at all.

The main reason billionaires pay so little income tax is that their income is largely in the form of the appreciating value of their assets (particularly corporate stocks). As long as they don’t sell those shares, their rise in value is not taxed under the income tax. Hence, billionaires can borrow against the appreciating value of their stock to finance their lavish lifestyles and defer paying income taxes until the stock is sold (in Canada, payment can be deferred until death, at which point the stock is deemed to have been sold). And even when the stock is sold, the gains are taxed at only half the normal rates. Indeed, the concept of taxable income is almost irrelevant for billionaires. While all amounts received by working people count as taxable income, billionaires make their fortunes through growth in the value of their assets, and that does not count as income under the income tax. Even if the income tax rate were increased to 100 percent, it would have little effect on the accumulation of their wealth. Hence the only way to tax billionaires effectively is to tax their wealth directly through an annual net wealth tax.

The ProPublica report dealt with American billionaires, but since the basic Canadian income tax rules are the same as those in the US, there is little doubt that an examination of the tax returns of Canadian billionaires would reveal that their income tax is a tiny percentage of their increasing wealth each year, leaving them largely untaxed.

In Canada, the Trudeau Liberals have insisted that they want to increase taxes on the wealthy. The mandate letter to Chrystia Freeland when she took over as Finance Minister called on her to identify “additional ways to tax extreme wealth inequality.” Apparently following through on that, Freeland’s 2021 budget proposed a 10 percent luxury tax on new cars and aircraft costing more than $100,000 and new boats costing more than $250,000. As the budget noted, “Even as Canadians have sacrificed to keep our economy going through the pandemic, some of the wealthiest have done well.” True, Canada’s billionaires are richer by $50 billion! So, making David Thomson pay a few thousand dollars more for a yacht or a private jet should even things up, right?

The current interest in wealth taxes really got started with the 2019 Democratic presidential campaigns of US Senators Elizabeth Warren and Bernie Sanders. Warren proposed a two percent tax on an individual’s net worth in excess of $50 million and a six percent rate above $1 billion. Sanders proposed a more aggressive and progressive tax, starting at one percent on net wealth above $32 million, rising to a marginal rate of eight percent on net wealth above $10 billion.

With progressive rates, a wealth tax could limit the growth of large fortunes, even reduce them in size. This is what the tax is supposed to do: stop the rich from accumulating ever bigger fortunes, and wielding ever more power over the rest of us. As the great US Supreme Court Justice Louis Brandeis noted: “We can have democracy in this country, or we can have great wealth concentrated in the hands of a few, but we can’t have both.”

The wealth tax also entered Canadian politics in 2019, during that year’s federal election campaign, when the New Democrats proposed an annual tax of one percent on net wealth of more than $20 million. The NDP proposal was timid compared to the proposals of Senators Warren and Sanders. The NDP’s tax started at a lower threshold but had no ramp-up in rates, even for billionaires. It would raise billions of dollars in revenue but it would do little to reduce wealth concentration.

Indeed, to actually slow or reduce the size of large fortunes, a wealth tax would have to have higher rates than even those proposed by Sanders or Warren. The renowned French economist Thomas Piketty has argued for bold rates rising as high as 90 percent on billionaires—thereby taxing billionaires out of existence.

 

 

Yet even the NDP’s gentle one percent tax on wealth was too radical for Canadian politics. When the NDP introduced a motion in Parliament last November calling for a wealth tax, only members of the NDP and Green Party voted for it. Finance Minister Freeland, no doubt keenly searching for “additional ways to tax extreme wealth inequality,” somehow failed to notice this obvious way.

In the current election campaign, the NDP has dropped the threshold for its wealth tax so that the one percent levy applies to all households with assets exceeding $10 million. This lower threshold means the tax would hit 87,000 wealthy households (rather than just 13,800 even wealthier ones) and raise an estimated $10 billion a year.

A net annual wealth tax is, just as it sounds, a tax levied annually on the value of a taxpayer’s wealth. It would include bank deposits, stocks and bonds, housing and real estate, assets in insurance, pension plans and trusts, business assets, personal assets such as artwork, boats and airplanes. Any liabilities such as mortgages and loans would be deducted from the total value of assets to arrive at the taxpayer’s net wealth.

Both in Canada and the United States, the idea of a wealth tax has sparked predictably fierce responses from billionaires, their supporters, their business interests, the right-wing think tanks they support, and the newspapers they own. In response to Senator Warren’s proposal, a former Goldman Sachs executive thoughtfully exclaimed, “This is the fucking American dream she is shitting on.”

 

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The wealthy have a long history of concocting fatuous arguments about why they shouldn’t face higher taxes. Here’s a list of the most common ones currently being trotted out against an annual net wealth tax:

Taxing wealth is unpopular. Despite the biased slant of mainstream Canadian media outlets, public opinion polls show strong, and rising, support among Canadians for a wealth tax. In a recent poll, Abacus Data found an astounding 89 percent of Canadians supported a one percent annual tax on wealth above $20 million—surely among the highest approval ratings for a public policy proposed in Canada. Support was spread across demographic groups, provinces, and political party supporters. For example, 83 percent of those intending to vote Conservative supported the idea, as did 91 percent of Liberal supporters, 93 percent of NDP supporters, 96 percent of BQ supporters, and 95 percent of Green Party supporters.

An annual net wealth tax is foreign to the Canadian tax system. In fact, Canada has an annual wealth tax; it’s called the property tax. This regressive tax is imposed on almost all the wealth held by low- and middle-income Canadians, namely on the value of their only substantial asset, their homes. A comprehensive net wealth tax would simply extend the property tax logically to all forms of property including that held primarily by the wealthiest, such as stocks and bonds. If middle-income Canadians can pay an annual tax on the value of all their wealth surely the wealthiest Canadians can as well.

A wealth tax has not worked in countries that have adopted it. In 1990 twelve European countries had annual wealth taxes, now only three do. Although various reasons have been offered to explain the repeal of European wealth taxes, analysts agree the taxes were badly designed. They had countless exemptions that were difficult to remove because of the political influence of those who benefitted from them; they had relatively low thresholds and thus fell on many merely rich families (contributing to their unpopularity and the difficulty of administering them); wealthy individuals could avoid them by migrating out of the country or evade them by placing wealth in secrecy jurisdictions.

The current crop of wealth taxes are designed to avoid these earlier problems. Most importantly, they have high exemption levels, thereby ensuring they only fall on the wealthiest individuals, and the taxes would apply to a comprehensive list of their assets. Hence, they would be much easier to administer and enforce. Moreover, wealth inequality has grown dramatically since the 1990s, as has public awareness and desire for action on the issue.

A tax on wealth would amount to double taxation. Since fortunes may consist of money that was originally earned and therefore subject to income tax, critics argue that a wealth tax will unfairly tax this money a second time. In fact, only a miniscule part of the richest families’ wealth has been subject to income tax. Almost all their wealth is due to the appreciating value of assets that is not taxed under the income tax until sold and then at very discounted rates. Moreover, double tax in this sense is common throughout the tax system—the same might be said about the tax paid on consumption (such as the HST and the tax on cigarettes) and of course the existing property tax. The various taxes are designed to serve different purposes and thus double taxation is not a valid argument against them. In particular, one of the purposes of a net annual wealth tax is to reduce the concentration of wealth. No other tax does or can serve this purpose.

The value of the assets is too difficult to determine. A large percentage of the assets of the wealthy are stocks and bonds that are traded daily and for which there is an easily determined market value. For assets such as privately-held businesses, valuations could be determined by a formula based on profits, adjusted book values and sales and only be required periodically instead of annually.

Many non-traded assets held by the wealthy, such as artwork and jewelry, are frequently valued for purposes of insurance or security on loans. It has been suggested that to ensure owners are self-reporting the true value of their assets, the government (or any private bidder) could be given the option of acquiring the assets at the reported value plus a surcharge of, say, 30 percent.

Some wealthy taxpayers have low incomes and thus might not have the cash to pay the tax. First, it is frankly hard to imagine that wealthy people would not have enough cash to pay a tax equal to a small percentage of the value of their assets. Indeed, if wealthy individuals have little cash, it’s likely because they’ve organized their affairs to realize little income—for example by allowing their capital gains to accrue—in order to avoid the income tax. That is to say, they have arranged their own illiquidity. There’s a simple solution: if wealthy individuals lack enough cash to pay the tax, they can borrow the required money from a bank.

Besides, wealthy people always have the option of selling some of their assets to cover the cost of the tax. It’s worth noting that little concern is paid to this problem when the assets of ordinary people are considered. When workers lose their jobs and have exhausted their employment insurance benefits, before they can qualify for some form of social assistance, they must value their assets (except their homes) and systematically liquidate them until they only have assets valued at less than one month’s entitlement to general welfare assistance.

The ultra-rich will find ways to evade the tax. Tax laws that permit widespread tax evasion by the rich are not laws of nature. They reflect policy choices made by legislators. Particularly with the computer advances of recent years, stopping tax evasion is technically easy and therefore simply a matter of political will. Recently-enacted international financial laws have made hiding wealth offshore much more difficult. Canada could help by establishing a national wealth registry which would require banks and financial institutions to report all financial assets they hold on behalf of their customers. And Ottawa could give more resources to the Canada Revenue Agency so that it could conduct more audits of the wealthy (the audits would more than pay for themselves). Finally, Canada could clamp down on the super-rich hiding assets from tax authorities by imposing and enforcing draconian penalties—including imprisonment.

The ultra-rich will avoid the tax by moving out of the country. A wealth tax would be much harder to avoid than the income tax. The tax is straightforward, with all the taxpayer’s wealth simply valued at the end of the tax year. Besides, wealthy individuals, like everyone else who grows up in Canada, typically have family, community connections, and other strong associations to the country that make them reluctant to move. The evidence suggests that migration responses to all forms of taxation are small. Besides, if some billionaires leave as the result of a wealth tax, so what?

The tax would discourage savings and entrepreneurship. Does anyone seriously believe that people would cease their entrepreneurial activities if they could only dream of receiving hundreds of millions of dollars instead of billions of dollars? Is an entrepreneur even thinking about a possible future tax while trying to come up with an effective innovation? Moreover, the revenue raised from such a tax could be used to finance public investments that are essential to economic growth, such as education, scientific research and infrastructure. The rich tend to spend their money on luxury homes and yachts rather than on productive investments like building roads, starting community colleges or conducting basic research.

To tax the wealthy, instead of introducing a new wealth tax, simply reform the income tax rules that apply to income from capital. The fortunes of the wealthiest taxpayers are mostly accumulated through the appreciating value of their assets, most often through the ownership of corporations that do not pay dividends. Income tax rules that would treat this appreciating value as income each year would be complex and politically difficult to enact since they would apply to all taxpayers. An annual net wealth tax is a much more feasible way of increasing tax exclusively on the ultra-rich.

Moreover, a wealth tax, since it taxes a taxpayer’s wealth regardless of the rate of return, encourages entrepreneurs to invest where they think they can generate the highest return. Compared to the income tax, it shifts taxes from productive to unproductive entrepreneurs. Also, to the extent a wealth tax falls on the owners of large businesses that have attained a dominant position in their industries, it would help other smaller players and therefore encourage more competition and innovation.

 

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Contrary to popular lore, the super-rich are not uniquely talented individuals deserving of enormous rewards. They became rich in most cases because of brute luck, because they were born into the right family or because they were able to capitalize on socially-created opportunities. Most of them do work of marginal social value—or often work that is actually destructive to society and the environment. To the extent that their contributions benefit the world, countless other individuals could undoubtedly make similar (or better) contributions if they were given more opportunities to develop their skills and ideas.

As usual, Noam Chomsky captured the essence of the situation: “One might speculate, rather plausibly, that wealth and power tend to accrue to those who are ruthless, cunning, avaricious, self-seeking, lacking in sympathy and compassion, subservient to authority, willing to abandon principle for material gain, and so on.”

Linda McQuaig and Neil Brooks are authors of The Trouble with Billionaires, published by Penguin Books Canada in 2010, and later in the United States and United Kingdom.

Neil Brooks is professor emeritus of tax policy at Osgoode Hall Law School in Toronto. Linda McQuaig is a journalist and author, most recently of The Sport & Prey of Capitalists.

[Top image: Even amid the pandemic, the ultra-rich have continued to hide and hoard their fortunes. The time for a wealth tax is now, write Linda McQuaig and Neil Brooks. Image by Canadian Dimension.]