Narrowing the wealth gap without raising taxes
The option leftist leaders avoid - let the markets work
I watched a recent episode of The Agenda with Steve Paikin entitled “Is it time for a wealth tax in Canada?” The panel of competent commentators had widely varied views on the issue but all seemed to accept the premise that inequality of wealth was a problem requiring a solution. Reality is that inequality of wealth is the objective of pretty well every Canadian evidenced by their desire to get ahead, earn more, see their investments outperform markets, work extra hours, and put money into savings. The concern of the panelists and Paikin (if they in fact have a concern) is more likely envy than a desire for equality, since to an individual they all appear to have enjoyed a level of success which is measured by the degree to which they have achieved a level of inequality.
Vilifredo Pareto, a sociologist and economist who died in 1923, long ago observed that every society everywhere has inequality as a natural outcome of luck, effort and individual strengths and weaknesses. We want our kids to do well in school and pursue higher education to have better lives and by better lives we mean to earn more than average and be able to afford to live well - in a nutshell, we desire inequality for ourselves and for our children.
Paikin followed the session with an interview with Paul Kershaw, a prominent economist who sees intergenerational disparity in wealth as the problem largely because people who had the presence of mind and financial ability to buy a home many years ago have seen the price of that home rise over the years, as Kershaw sees as a transfer of wealth to the elderly. But is it?
Reality is that the home they own may have gone up in price but it did not go up in value - it is the same home it always was. What has happened is the value of money has declined, a result of federal government policies to borrow recklessly, interfere in the economy, and of the central bank artifically lowering interest rates through quantitative easing (QE) driving up the price of assets without altering their actual value - a process that simply debased the value of money.
Having said that, we are faced as society with a situation of our own creation that our children cannot afford to buy homes since inane policies have driven up the price of homes and rising interest rates have made those homes even less affordable, while population growth (fueled in part by immigration) has outpaced the construction of new homes creating more upward pressure on home prices and increasing the disparity in wealth (measured in terms of money) between differing groups in our society.
The episode considered a “wealth tax” - an ideal so foolish as not to warrant sensible consideration. As economist Thomas Sowell has argued, people are not chess pieces and will act differently when tax rules change, including leaving a jurisdiction they see as hostile to their interests. Moreover, a tax that captured 100% of the wealth of the top 10% of citizens would be a one-time tax not repeatable, yet governments need continuous sources of income to fund continuous obligations like health care, education, pension, infrastructure, and law enforcement to choose a few.
The average net worth of the top 10% of Canadian households is $865,000. There are about 15 million households in Canada, so in rough terms the top 10% have aggregate wealth of about $1.3 trillion, about equal to the national debt. Tax it all away leaving this group with no assets whatsoever and you can barely repay the national debt. That creates a derivative problem - that group already pays 50% of all income taxes collected and without income earning assets, they would pay no taxes and become dependent on the state in many cases. Tilt. With annual outlays of about $300 billion and tax revenues dropping by half, deficits would grow and it would take only a few years and the national debt would once again top $1 trillion and there would no longer be the former top 10% of wealthy households to look to for revenue.
Taking money from people who have earned it and giving it to people who have not causes division unless the amounts taken are sensible and the recipients deserving.
There is a non-tax way to resolve the extremes of income inequality in Canada and it is relatively simple in concept. Increase the supply of houses.
Residential real estate has a money value in aggregate in Canada of $6.3 trillion according to a Microsoft Co-Pilot search. Home ownership is the greatest contributor to wealth inequality, as Professor Kershaw advances.
That money value of existing homes is more or less double the cost to build those homes. Based on data from Altus Group, residential construction costs in Canada are about $200 a square foot and the average home is about 1,500 square feet so it’s construction cost is about $300,000, yet the average selling price of a Canadian home is more than double that. There are about 8 million houses in Canada, a shortage some estimate at 1.5 million when compared to demand.
Construction of over 2 million homes would create a surplus of homes and market forces would drive the prices of homes down quite quickly to an equilibrium price equal to the cost of construction plus about 10% for builder profit, or about $330,000 per home.
The result would be an immediate redistribution of wealth from current homeowners to new owners, an aggregate transfer of about $2 trillion and the “wealth gap” would all but disappear over a few short years.
At present about 1.5 million people are employed in residential construction in Canada and build about 300,000 homes per year at current rates. Two million new homes would require over six years unless this workforce increased, but it is not a shortage of workers that limits construction - it is painfully slow permitting, the absence of serviced land which is being husbanded by municipalities and developers to drive up prices for the lands they control, and a building code which imposes a lot of needless red tape on the industry beyond the amount needed to ensure new homes are safe. Get rid of the “gatekeepers” as Pierre Poilievre calls the regulators, free Canadians to build without “permits” on lands they own as long they comply with building codes, eliminate “zoning” restrictions, and let the market work.
Of course, political leaders have a vested interest in not permitting the market to work. Without social problems, they have no agendae to promote to garner votes to acquire power, and by controlling markets they can fuel the amount of inflation they need to have a hope in hell of ever repaying the debt they have burdened Canadians with, since it can only be repaid if inflation ensures it can be repaid with a debased currency.
We live in interesting times.
The choice is free enterprise to grow the economy and all will boats rise, albeit unequally
or
play the redistribution game and feed those who suffer from envy and let the politicians control us with their distribution levers.
As Thomas Sowell says … there are no solutions, only tradeoffs