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Liberal hike to job-killing capital gains tax is inexcusable

It serves to make Canada’s tax system more equally punitive

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In her budget speech, Chrystia Freeland, defending the government’s capital gains tax hike to a two-thirds inclusion rate for amounts over $250,000 in a given year, suggested that without the tax hike kids would go hungry — a reference to the government’s National School Food Program. “Do you want to live in a country where kids go to school hungry?” she asked. If not, she remarked, stop complaining and pay up. This of course is nonsense: even if the federal government wanted to insert itself into the provincial responsibility of schooling with a food program, then defunding the CBC, as one easy example, would pay for it seven times over. There is no need for higher taxes.

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In addition to the suggestion that poor children will starve without the capital gains tax hike, there have been two main defences of it. The first, as the Liberals claim, is that the tax hike will hit only the super-rich. But even former NDP leader Thomas Mulcair points out, “this is going to clobber artisans, tradespeople, and small business owners” such as those whose retirement assets are non-principal residence properties bought decades ago (since they, unlike government employees, do not have defined benefit pensions).

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The other defence of the capital gains tax is that it increases horizontal equity, which means different types of income (labour income, dividends, and capital gains) will be treated more equally under the new policy, whereas previously capital gains were taxed more lightly. Unlike the claims that children would starve otherwise and that only the super-rich will pay the tax, this is a valid argument. But it doesn’t make the tax hike a good thing.

A person whose left leg is already in a cast is unlikely to benefit from an anvil dropped on his right leg to create a symmetrical handicap on the other side; similarly, Canadians suffering a taxation beating when it comes to their labour income will not be helped by Trudeau’s tax hike to “catch up” the severity of the capital gains taxation beating. And, importantly, the people who bear the economic burden of the tax are not only the people on whose tax returns the incidence of the tax appears. Raising the capital gains tax will reduce economic productivity, to the detriment of all Canadians whether they have large capital gains or not.

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In 2004, a working paper published by Canada’s Department of Finance estimated the costs to society of seven types of taxes and found that personal capital income taxes were the second most damaging to GDP — in fact, considerably more damaging than corporate income taxes, personal income taxes, and payroll taxes. Other studies have come to similar conclusions, and these results are not surprising. Economic productivity relies on capital investment, and increasing taxes on investment discourages it.

As summarized in a bulletin from the Tax Foundation, a leading think tank in Washington, DC, “Capital gains taxes create a bias against saving, which encourages present consumption over saving and leads to a lower level of national income.” If investing money leads to an extra tax, people are likely to just consume today instead. Notably, capital gains taxes discourage entrepreneurship and, as the Tax Foundation bulletin notes, “because the capital gains tax is a tax in addition to those on wage and business income, the capital gains tax is an asymmetric tax on successful entrepreneurial ventures.”

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Moreover, if Canadians know the money they earn today will be taxed more heavily when they invest it tomorrow, the Liberals’ capital gains inclusion rate increase is effectively a tax hike on income earned today. The Trudeau government already has a track record of imposing income tax hikes it claimed would only hit “the rich” but which proved to create widespread negative effects. When the Liberals came to power in 2015, they promptly increased the marginal tax rate on the top one per cent of income earners, with such strong negative effects that combined federal and provincial revenues actually fell despite the higher tax rate.

The capital gains tax hike exacerbates the economic harm of Canada’s already punitive tax regime, and contrary to the Liberals’ claims, imposes burdens on all Canadians and not just “the rich.” The Canadian economy is already severely handicapped by the Liberals’ spending explosion, over-taxation, and oppressive regulation: from 2015-Q3 to 2023-Q4, cumulative real GDP growth per capita was less than one per cent in Canada compared to over 15 per cent in the United States. And now comes another anvil in the latest budget to flatten Canadian taxpayers and workers even more.

National Post

Matthew Lau is a Toronto writer.

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