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Tax the rich.

That’s been a rallying cry for the left for a long time, but the volume has risen in recent years. In France, Thomas Piketty’s weighty economic analysis, Capital in the Twenty-First Century, became an unlikely bestseller. In the United States, income inequality and wealth taxes were centrepiece issues in the Democratic presidential nomination race.

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And here in Canada, the Liberal government has flagged its intention to do something – what is not yet clear – to address what it calls “extreme wealth inequality.”

Part of the mission of Tax and Spend is to provide context to big economic questions by stepping back from the news of the day and weaving together strands of the story into a larger picture. That is very much the case with this week’s instalment, on some of the debate over the difficulties in implementing wealth taxes.

On Jan. 14, the Parliamentary Budget Officer published a research report on the government’s planned increase in taxes on employee stock options (one of the two specific measures that the Liberals have cited as addressing wealth inequality). The PBO note made it clear that it was difficult to gauge the magnitude of the behavioural response by individuals and companies to the new measure.

The next day, the government made public the mandate letters sent out as part of the mini-shuffle of cabinet, including a supplementary letter given to Finance Minister Chrystia Freeland. In that letter, Prime Minister Justin Trudeau spelled out several new expectations, including his wish for Ms. Freeland to “identify additional ways to tax extreme wealth inequality.”

The PBO’s research isn’t meant to be a rebuttal to the government’s plans, but that analysis (plus a similar effort from the summer looking at the NDP’s proposal for a wealth tax) underscores the uncertainty inherent in attempting to increase taxes on wealthy individuals. Expecting them to simply shrug, and pay a higher tax bill, flies in the face of textbook economics, not to mention common sense.

But a lot depends on the magnitude of that reaction: those sympathetic to Mr. Piketty’s arguments think that there will be a relatively small reaction to higher taxes, and that levies on high income and wealth will turn out to be major revenue generators. Others look at history, see highly mobile capital and individuals, and conclude that wealth taxes will be far less lucrative. That’s the tension that Tax and Spend explores.

Taxing questions

In the Jan. 15 Tax and Spend, I wrote about what, for many, would be the unexpected result of last year’s expected steep drop in greenhouse-gas emissions: a dip in carbon rebates next year. That’s the result of the structure of those rebates, which are based on returning 90 per cent of carbon revenues to households, but are based on projections.

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If, as was the case in 2020, those projections are off, the rebates in the following year are adjusted. For 2020, the estimates were too high, meaning that revenues will be lower than expected – and the payments that were sent out last spring were overly generous. In the comments section for that story, Mike T. questioned the merits of the carbon rebates, writing: “So if emissions go up, I get more money? If I spent $8,000 on new windows based on getting a certain amount, now that won’t happen. I think I get the picture.”

Mike raises an interesting question about the usefulness of investing in energy-saving retrofits, although he’s a bit off base in linking that to the level of carbon rebates in a given year. The amount of that payment is irrelevant to the financial case for retrofits or other green expenditures (although it might make it easier to pay for them).

The real question is the payback period; in other words, how long will it take for the money you save to match your initial investment. There’s the money you save from consuming less energy. And then there are the added costs of carbon pricing, which is designed to tilt the table toward more energy-efficient behaviour. By increasing the cost of fossil fuels, carbon pricing also increases the potential savings, and shortens the payback period for energy-efficient investments. That’s the calculation that matters – not the size of Ottawa’s rebates.

Line item

Paying the bills: The Liberals announced a two-year freeze in Employment Insurance premium rates back in September, a move designed to give workers and companies a bit of a break during the pandemic. But the EI system operates under pay-me-now or pay-me-later rules; the government must set rates at a level that, over a seven-year period, matches revenues to expenses. Usually, the government provides that plan as part of its budget, and economic updates. It did not do so this year – but the Parliamentary Budget Officer has stepped in, with a blog post that spells out the long-term consequences of that two-year freeze. The upshot: There is likely to be a 15-cent increase in the premium rate, rising to $1.73 per $100 of insurable earnings in 2025-26, up from $1.58 currently. That might not sound like much, but it would be the biggest hike in premium rates since at least 1998.

Subsiding subsidies: How far should the government go before rolling back wage subsidies? That’s the sensitive, but important, question that University of Waterloo economist Mikal Skuterud raised in a Twitter thread in response to a Globe article on the gloomy forecast of more businesses closing shop for good. I’ve talked with Prof. Skuterud many times, and he’s always keenly aware of the human cost of a lost job or business bankruptcy. But he raises critical issues in his tweets, namely – what is government’s responsibility in shoring up companies that have not-so-viable business models? And what is the damage from preventing capital and workers flowing to innovative companies? You can read more on that topic here.

Follow me on Twitter, @PatrickBrethour

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