Higher capital gains taxes will further threaten living standards in Canada

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Appeared in the Financial Post, March 21, 2023
Higher capital gains taxes will further threaten living standards in Canada

In a recent op-ed, Simon Fraser University professor emeritus Rhys Kesselman argues for higher capital gains taxes (again) to ensure that higher-income earners pay their “fair share.” However, he doesn’t define “fair share” and ignores the dismal state of investment in Canada and the even worse growth prospects for the future.

While Kesselman’s op-ed acknowledges that higher capital gains taxes could imperil investment and economic growth more broadly, his own 2000 study had a stronger conclusion, noting that “studies that have distinguished among different types of taxes find that some types of taxes are more adverse to economic growth than other types. In particular, it is found that taxes on capital income and savings are detrimental to long-run economic growth.”

The reason for these adverse effects is simple. Higher capital gains taxes reduce the after-tax rate of return on investments. In turn, entrepreneurs and investors will simply invest less in Canada at a time when we desperately need the exact opposite. We should encourage—not discourage—entrepreneurs, businessowners and investors to invest in Canada.

Consider that since 2014, business investment (adjusted for inflation) has declined 3.1 per cent. If we exclude residential development and only look at investment in such things as factories and plants, investment is down 22.5 per cent, and investment in machinery and equipment is down 2.9 per cent. Simply put, Canadians have been suffering from a dearth of business investment for almost a decade.

And they’re suffering because such investments are key to improving the productivity of Canadian workers, which is ultimately the only way to improve living standards. A recent study by the Organization for Economic Cooperation and Development (OECD) analyzing the growth prospects for 32 countries over the 2020-2030 and 2030-2060 periods concluded that Canada would record the lowest level of per-person growth in GDP in both periods.

What does this mean for average Canadians? It means our standard of living (on average) will grow the least among the industrialized countries over the next 40 or so years. Among the 32 countries analyzed, Canada will fall from the 16th highest per-person GDP in 2020 to an expected 25th by 2060 as other countries record stronger growth. Countries as diverse as the Czech Republic, Estonia, Israel, Italy, Korea, New Zealand, Slovenia and Turkey, which currently have lower levels of average per-person GDP, are expected to leapfrog Canada by 2060, which means these countries are expected to have higher living standards than Canada by 2060 because of relatively stronger economic growth.

It's within this context that Kesselman argues Canada should become less competitive and less attractive for investment to ensure fairness. But again, conveniently, he provides no definition or even data about tax fairness.

But the only objective measure of tax fairness is the share of total income earned by a particular group compared to their share of the total tax burden. Kesselman’s implicit argument is that top earners don’t pay enough to represent a “fair share” but the data tell a different story. According to a recent study, in 2022 the top 20 per cent of income-earning families in Canada paid 53.0 per cent of all taxes (federal, provincial and local) while earning 44.6 per cent of total income. In other words, they paid a much larger share of the total tax burden than their share of total income.

In contrast, the middle 20 per cent of income-earning families earned 16.0 per cent of total income and paid 14.3 per cent of total taxes in 2022. In other words, middle-income families paid a smaller share of the total tax burden than their share of total income. The top 20 per cent of income-earning families are the only group who pay a higher share in taxes than they earn in income. So, the question is how much more should the top 20 per cent pay to reach this undefined threshold for “fairness?”

Government policies—federal, provincial and local—should focus on encouraging economic growth, entrepreneurship and investment. That’s what Canada desperately needs. Calls to increase taxes on upper-income Canadians ignore all these considerations. Getting Canada’s most successful entrepreneurs, businessowners and investors to further invest and develop businesses in Canada is key to our future prosperity.

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