Taxing the über-rich

A few nights ago while working on our 2009 income tax returns, I noticed that my wife has paid to Revenue Canada close to 20 per cent of her salary as income taxes which were deducted at source. This is much more than I earn annually from my part-time teaching job and my small retirement pension. Aside from her salary, my wife also earned additional income from royalties (mostly from the Public Lending Right Commission), permission from a publisher to include her work in a book, and a grant from the Toronto Arts Council.

Which makes me start thinking that maybe my wife must be über-rich and I start wondering where all the money is going after the taxes are paid. The truth, however, is, with all our debts that had accumulated over the years, plus all the GST and sales taxes we’ve been paying and a few loans to our daughters which we don’t expect to be repaid, we’re actually only a few notches above the poverty line. And it took only a fraction of a second for reality to dawn upon me.

But the worse is not over yet. Come July 1, 2010, the province of Ontario will begin implementing the much-hated Harmonized Sales Tax. The HST, as it is commonly known in these parts, combines the provincial and federal sales tax on products and services: 5 per cent GST and 8 per cent Ontario PST. As a result, many items that used to be exempt from sales tax will now be taxed. Maybe it’s time to move to Prince Edward Island, the only Canadian province that is not imposing HST on its residents.

There is a likelihood of spikes in the price of gasoline and heating fuels. Electricity will no longer be exempt from provincial sales tax, and the same applies for tobacco, personal services like haircuts, membership fees for clubs and gyms, newspapers and magazines, taxi fares, real estate commissions, and professional services of lawyers, architects and accountants. Everything will now be caught by the HST. My barber will surely feel embarrassed every time his loyal customers bring up the subject of HST on their bills.

According to the provincial government, Ontario is implementing this single sales tax to put in place “what is viewed as the most efficient form of sales taxation around the world.” Ontario’s finance ministry expects the single sales tax to reduce the cost of goods that the province exports, making it more competitive and boosting a sector of the economy that has been particularly hard hit by the economic downturn. The ruling Ontario Liberal Party hopes that revenues from this single sales tax will create more than 590,000 new jobs and make the province a more competitive environment for investment.

But why is it that the government never mentions that the GST or PST, or this harmonized sales tax is fairly regressive, being a consumption tax? Eventually, the poor pay a much greater portion of their income in sales taxes than the rich. Sales taxes also act as break on consumption, which is why in slow economic times, they are often cut to try to stimulate spending.

From reading the classic textbook by Paul Samuelson and listening to my Economics 101 professor, I have learned in college that a regressive tax, like the sales tax, imposes a greater burden on the poor rather than on the rich. Because the poor have less disposable income than the rich, a sales tax creates an inverse relationship between the tax rate and the taxpayer’s ability to pay as measured by assets, consumption or income. Hence, the single sales tax which will take effect this coming July will leave families with lesser incomes feel the pinch since they have to spend more on a range of goods at a time when they are already struggling to deal with job losses.

If the government wants to have more revenues to spend for its programs and services, why not stop spending too much money or fix or cut wasteful programs as a start? Spending restraint should be the government’s first option in deficit fighting, rather than general tax increases.

The eminent historian Professor Michael Bliss of the University of Toronto goes a step further when he suggested that the U.S. and Canadian governments seriously consider returning to post-Second World War levels of tax on very high incomes. Bliss observed that inequality of compensation has soared in our time, as the rich have become much richer and less taxed.

Professor Bliss wrote: “Higher taxes on high incomes would begin to narrow the immense chasm that has opened between the über-rich and the ordinary North American. If properly applied, they could put an end to the frustrating debate about the obscene salaries and bonuses we pay not only to flailing financiers but to mediocre professional athletes.” This idea has been floated around before.

A few months after the bombing of Pearl Harbor in 1942, President Franklin Delano Roosevelt urged the U.S. Congress to limit the income of any one American. FDR said that a time of “grave national danger, no American citizen ought to have a net income, after he has paid his taxes, of more than $25,000 a year. Discrepancies between low personal incomes and very high incomes should be lessened.”

The limit FDR proposed would be about $300,000 in current dollars. His proposal was called “a blatant piece of demagoguery” by the New York Herald Tribune. Of course, FDR was simply stating, which most Americans at that time believed, was what needed to be said. That during a time of national crisis, the rich needed to pay more in taxes, a great deal more.

Sixty years later, President George W. Bush would object to FDR’s notion of taxing the rich a little more. Instead, Bush would propose a $674 billion tax cut, with 32 percent of that cut going to America’s richest 1 percent. Bush would have the audacity to insist that in a national crisis of a war against terror, America’s wealthiest citizens should pay not more in taxes, but, a great deal less.

In his book, Greed and Good: Understanding and Overcoming the Inequality that Limits Our Lives, Sam Pizzigati has documented an encyclopedic narrative of the gross inequalities rotting the American dream. A veteran labour journalist, Pizzigati makes a compelling case that increasing inequality contributes to rising unhappiness, corruption of professions like law and medicine, environmental destruction, less innovative businesses, slower economic growth, a fraying social fabric and much more.

Pizzigati argues that a just society must not only “level up” the poor but also “level down” the rich, capping their incomes at ten times the minimum wage. That would create a real incentive for the elite to raise the wages of most workers in order for them to increase their own incomes, and it could have a wide range of benefits and give a free reign to motivations other than greed.

Professor Bliss’s idea to tax the über-rich therefore makes sense because it would reduce the deficit and social resentment, and is a sound strategy that is grounded in intelligent populism.

Perhaps, Canada’s federal and provincial governments should seriously heed the suggestion of TD Bank CEO Ed Clark that he and many of his colleagues would be in favour of having their taxes raised. In addition to spending restraint, taxing the wealthy, instead of raising sales taxes such as the HST in a period of economic downturn, seems to be a more intelligent and equitable option.