The rich say boosting the capital gains tax will hurt productivity, but it’s just not true. Time to do a little myth-busting

Posted on June 17, 2024 in Equality Policy Context

Source: — Authors: – Business/Opinion
June 15, 2024.   By Jim Stanford, Contributing Columnist

Having to pay taxes on slightly more of their income has the well-heeled reaching for torches and pitchforks. Meanwhile, most of us manage to get by paying tax on 100% of our incomes, Jim Stanford writes.

Finance Minister Chrystia Freeland tabled legislation this week detailing proposed reforms to capital gains taxation. At present, individuals and corporations only report half their capital gains (profits from selling an asset for more than it cost) on their tax returns.

In future, individuals must declare two-thirds of gains above $250,000 in a year (below that threshold, the inclusion rate remains 50 per cent). Corporations will also need to include two-thirds of capital gains (although only one in eight report capital gains at all). Important exemptions (for primary residences, small businesses, farmers and startups) are maintained and expanded.

A capital gain results not from producing and selling a product or service, but rather from acquiring and reselling an asset. It reflects speculation, not production. Other forms of income (like wages) must be fully declared. Granting asset traders this unique preference is morally unfair, and fiscally wasteful.

Capital gains exemptions are captured overwhelmingly by very well-off Canadians. Indeed, there’s no other loophole so targeted at the wealthy. In 2021, just 1.5 per cent of tax filers had total income over $250,000. Yet they pocketed 61 per cent of capital gains exemptions — worth $180,000, on average, to each claimant.

By splitting this measure from its overall budget legislation, the government hoped to show who in Parliament sides with this wealthy minority. Ending weeks of speculation, Conservative leader Pierre Poilievre took the bait and voted against the reform. Worried this will show he supports rich “elites,” despite his ostentatious criticisms of them, Poilievre frames his opposition as just the opening salvo in a bigger crusade against overtaxation.

But it’s hard to even interpret this reform as a “tax increase.” The tax rates paid by capital gains recipients won’t change. It’s merely that they’ll have to pay tax at all on an additional one-sixth of their profits (the difference between 50 per cent and 66 per cent) that has the well-heeled reaching for torches and pitchforks. Meanwhile, most of us somehow manage to get through life with a 100 per cent inclusion rate on our incomes.

Finance Canada estimates just 40,000 tax filers (0.13 per cent) are directly affected by this change. But powerful voices are defending this rich loophole, portraying the reform as a much broader tax grab. Here are some of the disingenuous myths being propagated in this fear campaign:

Undermining entrepreneurship

A capital gain is not generated by running a business; it’s generated by selling it. If your goal is to run a successful productive business, please keep doing so — with no change in your taxes. Generous new exemptions for startups mean capital gains taxes will fall, not rise, for genuine entrepreneurs.

Discouraging innovation and productivity

Business spending on machinery and innovation has been falling since the 1990s — over the same time as corporate taxes (including on capital gains) were being slashed. Cutting the capital gains inclusion rate (it used to be 75 per cent) didn’t help productivity; raising it won’t hurt.

Punishing doctors

Most professionals incorporate to obtain generous tax and liability benefits. Capital gains exemptions are just the icing on that very sweet cake — and most of the icing is still there. Doctors and other professionals can fund retirement like the rest of us (via CPP, RRSPs, TFSAs and savings) despite a smaller capital gains loophole.

Taxing the family cottage

Any modestly intelligent accountant can easily avoid higher capital gains on all but the most expensive family cottages and farms. Farms have a $1.25 million lifetime exemption. The $250,000 annual threshold can be claimed by each member of a family with shared ownership. And by staging property sale over several years (through a capital gains reserve), that threshold can be invoked repeatedly.

Most academic economists support a higher inclusion rate, partly because it levels the playing field between different types of capital income. But the best motivation is $20 billion in revenue it will raise over five years, to support modest new programs announced in this budget. This will help fund school lunches, affordable housing initiatives, dental care and disability benefits — while still respecting Freeland’s fiscal “guardrails.”

It’s not just how this revenue is raised, but how it’s spent, that will make Canada a bit fairer and healthier. And make no mistake: defunding those programs is the main motivation for Poilievre’s opposition to this tax measure, and taxes in general.

Jim Stanford, director of the Centre for Future Work in Vancouver, is a freelance contributing columnist for the Star.

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