A Baby Steps Wealth Tax

Justin Trudeau’s Liberals have taken their first baby steps towards taxing wealth directly. In her April, 2021 budget, Finance Minister Chrystia Freeland introduced a luxury tax on cars and planes selling for over $100,000 and boats selling for over $250,000. (I didn’t know that you could buy a plane for less than $100,000, or that you could spend up to $250,000 on a boat without it being considered a luxury item).

Buyers of cars priced over $100,000 will pay a tax of the lower of 20 per cent of the purchase price in excess of that amount, or 10 per cent of the total purchase price. The purchase price includes HST, so you will have the opportunity to pay tax on your tax.

There are some exceptions. Hearses, for instance. Maybe rich people will start emulating Neil Young and drive around town in hearses. I’ll bet somebody has already commissioned a legal opinion as to whether a vehicle has to carry a coffin in order to be considered a hearse. Motorcycles, all-terrain vehicles, snowmobiles, racing cars and recreational vehicles are also exempt from the tax.

The luxury tax won’t make much of a dent in the federal deficit. In Its first five years, the tax is supposed to bring in just over $600 million, which doesn’t even knock a billion dollars off the present annual deficit of $400 billion. So government may be tempted to extend the tax beyond those baby steps to include a wider range of luxury items, such as that Renoir you picked up at a garage sale or that complete set of autographed Pink Floyd concert posters you bid for on E-Bay, not to mention your second residence or stock portfolio.

However, the Liberals have been careful to keep their options open. If the political winds were blowing in the other direction, they could simply pull back on wealth taxation on the basis that it was only ever meant to be a temporary and limited measure.

But here’s the thing. The luxury tax does not come into effect until January, 2022. That gives buyers lots of time to buy their luxury cars before they are dinged for the new tax. That will be a boon for luxury car salespeople in the short run: demand will drive prices up, and sellers will be able to mark up their goods to a level just below next year’s tax added price.

But does this spell trouble in the longer term for luxury car dealers? Will the wealthy in fact stop buying their Lamborghinis and Bentleys in 2022 and beyond? Will there instead be a boom in sales of humdrum Mercedes and Volvos priced at $85,000 or less? Will luxury car dealers then have to resort to “we pay the tax” or “do what it takes to clear the lot” gimmicks in order to move their product?

I doubt it. According to a recent report, sales of Lamborghinis and Bentleys are booming, in part because of a rise in the stock market and in part because rich millennials from the tech world haven’t been able to spend on travel and have instead, perhaps out of boredom, been working the Internet and custom specifying the models and options they want.

And when you look more closely at the formula for calculating the luxury tax, the incremental 20 per cent option means that you get a graduated luxury tax levy on a purchase price of up to $200,000. Who really wants to spend more than that on a car, however luxurious it may be? Wouldn’t it be more fun to have two or three ‘cheap’ cars instead, so you could select a drive based on your mood and the weather?

One more point to consider. Not that I know it from personal experience, but isn’t the best part of being rich to show how unconcerned you are at paying more than you have to. Maybe it will become a status symbol to buy a Rolls Royce and drive it around town flashing the not so subtle message that “I paid the luxury tax on this sucker—and I don’t care!”

I think these baby steps of a wealth tax are really just intended to be a nudge and a wink to the wealthy to say “Look, we’re sorry to do this to you, but we have to play to the gallery a bit. This isn’t really going to hurt you that much, and it will go away eventually. Buy something now if you really don’t want to pay the tax, and contribute to the recovery. But if you don’t play ball with us, we can always go in the other direction.”