At the heart of French economist Thomas Piketty’s unlikely bestseller, Capital in the 21st Century, is a controversial antidote to rising inequality: a global tax on capital.
Canada, too, could tackle the inequality problem with a major overhaul of the corporate tax system, starting with an end to the special treatment of capital gains and dividends, according to a report released Tuesday by the University of Toronto’s Mowat Centre.
“Upper-income groups have gained disproportionately to middle- and lower-income groups in recent years, reflecting rising inequality,” argue the authors, Queen’s University economist Robin Boadway and University of Ottawa economist Jean-François Tremblay.
The authors make the case that Canada’s existing corporate tax system is just as bad for business. It increases the risk of bankruptcy by favouring debt financing over equity financing, and it discourages investment, innovation and productivity.
And because of increased global competition, the cost of corporate taxes is typically passed on to workers in the form of lower wages.
“The reforms are meant to make the system not just more efficient and more friendly to productivity and investment, but in a sense fairer,” Mr. Boadway said in an interview. “The burden of the corporate tax is largely borne by workers.”
The study’s complex solution is to move to a “rent-based” system that would tax extraordinary profits, rather than income, coupled with a special deduction for the cost of equity finance.
“No economic inefficiency would result,” the report said. “In most cases, a tax on rents does not create a disincentive to investment, unlike a tax on normal profits.”
The drawback of shifting to a tax on above-normal profits is that it would generate less revenue – roughly 19 per cent or $6.2-billion less.
But the government could bring in an extra $8.5-billion a year by eliminating the special breaks for dividends and capital gains, increasing overall revenues. These breaks disproportionately benefit the rich, the authors argue.
The authors argue that the current system was designed mainly to keep individuals from ducking taxes by keeping income in a corporation. That rational no longer exists because Canadians have access to other tax shelters, such as registered retirement savings plans and tax-free savings accounts. “Canada’s corporate tax system needs reform,” the study concludes.
In his controversial book, Mr. Piketty warns that global economic growth will limp along at just 1 to 1.5 per cent for the rest of this century – roughly half the pace of the last century. Without intervention, the result will be growing inequality and social strife.