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Matt Spoke: We all benefit from lower capital gains taxes—even if you’re not rich


I’ve been following many of the discussions that have taken place since the release of the Trudeau government’s budget. There is too much in the budget to cover in-depth, but I think it’s worthwhile diving in on one of the more controversial measures: namely, the increase in the capital gains inclusion rate for corporations and for individuals (above $250,000 in the latter case). 

Most observers, rightly so, have framed the measure as a tax on the so-called “ultra-wealthy”. In fact, the Liberal Party’s official X account used those exact words. It has since precipitated a predictable debate about tax fairness, redistribution, and so on.   

Fellow Hub contributor Trevor Tombe’s post-budget analysis focused on the tax change through the lens of tax policy principles. He concluded that “raising capital gains taxes makes sense” based on the notion that we ought to aspire to what he calls “fairness” in the differing tax treatment of income and capital. 

This line of thinking draws on the famous tax policy idea that “a dollar is a dollar is a dollar.” Why should one dollar be taxed differently than another?

What the proponents of this policy thinking seem to overlook is how important capital is to the productivity of an economy, and as importantly—in the context of this budget in particular—to the creation of housing. 

Broadly speaking, “capital” is money invested into assets for the benefit of creating economic value. For example, when someone buys stock from a company, they are providing capital to that company for the purpose of fuelling its growth, investing in its research and development, growing its workforce, etc. 

When buying or building a home, that capital is being used to provide a valuable service to a family, to rejuvenate a neighbourhood, and to support the needs of a growing population.

In other words, capital creates value; not only for the person investing it, but also for anyone receiving secondary benefits in the form of employment, product innovation, differentiated services, and even housing. These spillover effects—what economists clunkily call “positive externalities”—are a key reason why the tax system tends to treat capital differently than income.  

To increase taxes on capital is to invariably decrease these spillover effects and the benefits derived from secondary recipients and the economy and society as a whole. 

This is particularly true when we consider the housing crisis the country is currently facing. The crisis itself is in large part a result of insufficient capital. The secondary losers are the average Canadian family who currently can’t afford a home.

Ahead of this budget, the Trudeau government received significant praise for its bold Canada Housing Plan for recognizing the problem. Yet missing from that plan was something that seemed like an unintentional omission: any mention of the fact that housing only gets built when risk-taking individuals put their own capital at risk as the equity required to finance any new development. 

It’s as if the government had failed to understand that housing—like any other product or service in the economy—does not get produced without capital. This budget confirmed that lack of understanding. 

New construction is seen behind Prime Minister Justin Trudeau during a housing announcement, in Vaughan, Ont., Thursday, Oct. 5, 2023. Vaughan mayor Steven Del Duca, left, and Vaughan-Woodbridge MP Frank Sorbara, look on. Nathan Denette/The Canadian Press.

Previous housing strategies—including the most recent Conservative election platforms from the 2019 and 2021 elections—have recognized that capital is so critical to housing creation that they proposed policies to significantly reduce, and almost eliminate, capital gains taxes on real estate transactions (so long as the proceeds are reinvested into real estate). The intent of this policy would have been to promote the sale of land for development and to promote the reinvestment of any proceeds back into the creation of new housing. 

Instead, in this budget the government has chosen quite the opposite. It’s chosen to disincentivize people from selling underutilised land. It’s chosen to disincentivize the very people who would put their capital at risk for all of our benefits. That will mean less housing, fewer new companies, less competition, and less product innovation. Less Less Less. 

Let’s not be surprised when less of that capital is made available. Research on the deleterious effects of taxes on capital is well established. It’s intuitive after all. It’s the same principle that underpins the Trudeau government’s carbon tax policy. If you tax something, all things being equal, you will get less of it. 

The budget outlines some good measures on housing that others at The Hub have written positively about. Unfortunately for Housing Minister Sean Fraser though (and frankly, for all of us), after a year of valiantly building a plan to address our housing crisis, all of his efforts may have been completely undone because of this one new tax on capital. 

Following this budget, we all experienced a capital loss. 

The Weekly Wrap: The Liberals lean all the way into class warfare


In The Weekly Wrap Sean Speer, our editor-at-large, analyses for Hub subscribers the big stories shaping politics, policy, and the economy in the week that was.

What’s behind the capital gains tax increase?

Although the prime minister had already announced most of its signature measures over the previous week or so, this week’s budget still contained one notable surprise: an increase to the capital gains tax rate for capital gains above $250,000 for individuals and at any level for corporations and trusts. 

We had anticipated the budget would set out tax increases for corporations and high-income earners—in fact, the March 9 edition of the Weekly Wrap warned that the budget might “appeal to class warfare”—but we didn’t expect changes to the capital gains tax regime. The disincentives for entrepreneurship and investment seemed too high in the face of a stagnant economy, low business investment, and declining productivity. 

The budget proposal, which is projected to raise nearly $20 billion in new revenues over the next five years, has generated significant criticism from entrepreneurs and investors who rightly warn that it will discourage business start-ups and capital investment. Calgary-based investor Derrick Hunter has written about these risks for The Hub

At a time when the Canadian economy is in high demand of capital to expand the housing supply, increase business starts, and boost productivity, this is a counter-productive policy. There’s a considerable body of research that shows that capital taxes are among the most economically damaging forms of taxation. The economic costs of extracting this capital from investors and handing it over to the federal government are therefore likely to be significant. Especially since it wasn’t offset by accompanying tax reductions as Hub contributor Trevor Tombe set out in his post-budget analysis. 

It prompts the question: why is the Trudeau government doing this? 

We know for instance from former Finance Minister Bill Morneau that it’s been something the government had considered and rejected in the past. It strikes me that there are three explanations for adopting it now. 

  • Politics: The government hopes to bait Pierre Poilievre and the Conservatives and/or parts of the business community into a fight in which the prime minister can reposition himself as on the side of middle-class Canadians. His gratuitous use of the “ultra-wealthy” in recent days to describe those affected by the policy change is a sign that the government is in search of a wedge issue. 
  • Fiscal anchor: Between the 2023 budget and Fall Economic Statement, the government committed to lowering the debt-to-GDP ratio on a year-over-year basis, and without the new revenues from the tax change (particularly the windfall in the current fiscal year) it’s quite likely it would have once again broken free from its anchor. This would have not only set up the government for political criticism, but it may also have increased the likelihood that it faces a credit downgrade for its lack of fiscal credibility.  
  • Ideology: The most underrated explanation is that the Liberal Party itself has evolved from a centrist party with corporate sensibilities to a much more progressive party that’s skeptical of capital and more predisposed to income redistribution and an activist state. This point cannot be overstated: it’s notable for instance that the budget change reverses a cut to the capital gains tax rate enacted by the Chrétien government in 2000. 

Whatever the ultimate balance of factors behind the government’s decision, the economic effects are still the same: hiking taxes on capital is bound to worsen Canada’s investment climate and ultimately its economy as a whole. 

Prime Minister Justin Trudeau, Deputy Prime Minister and Minister of Finance Chrystia Freeland are joined by cabinet ministers for a photo before the tabling of the federal budget on Parliament Hill in Ottawa, on Tuesday, April 16, 2024. Justin Tang/The Canadian Press.
Generational fairness requires prioritizing growth

The Trudeau government has sought to define this week’s budget in terms of “generational fairness.” It spoke for instance of the need to “restore a fair chance for Millenials and Gen Z.” Finance Minister Chrystia Freeland’s budget speech even claimed that we find ourselves at a “pivotal moment” for these cohorts. 

This political positioning is understandable yet insufficient. There’s plenty of evidence that younger Canadians are feeling anxious and agitated about their circumstances. They cannot afford homes. They’re delaying marriage and family formation. And, as we outlined this week in The Hub’s first bi-weekly DeepDive, they’re increasingly unhappy. 

The numbers are striking. Younger Canadians used to report higher levels of happiness than older Canadians. Not anymore. Canadians under age 30 are now on average less happy. Canada’s overall level of satisfaction ranked number 15 in this year’s World Happiness Report. But if you limit it to younger Canadians, we actually fall to number 58 along with countries like Paraguay, Malaysia, and China. 

There’s a tendency to observe these dynamics through the lens of politics. A key reason that the budget is so focused on this cohort is because it has abandoned the Liberal Party en masse. The Conservative Party of Canada is the only centre-right party in the Anglo-American world that currently has a political advantage among younger voters. These developments challenge long-standing political axioms about the interaction between demographics and political preferences.

But the biggest issue here isn’t politics. There’s something far more concerning about the demographic, socio-economic and even psychological effects of large numbers of young Canadians experiencing  “failure to launch” syndrome. It can have long-run costs and consequences for individuals and society as a whole.  

It’s not a coincidence for instance that the fertility rate is at an all-time low at the same time that Canadians under age 30 are reporting rising levels of unhappiness. Causality is doubtless working in both directions.  

An unmarried, childless future in an ugly and overpriced, small downtown apartment is a rather grim proposition. Nothing in the totality of human experience tells us that these are the conditions for human flourishing or a successful society. 

Some of the budget measures may help on the margins. But one does get the sense that there’s something bigger going on here and technocratic solutions are a necessary yet insufficient response. Howard Anglin’s article for The Hub this weekend about building aesthetics, textured neighbourhoods, and what Tim Carney calls “family-friendly” communities starts to get closer to some of the underlying factors behind this generational malaise. One could also point to the void of spiritual questions—though that’s beyond the scope of public policy and certainly this essay. 

I would however make the case for a lack of growth and progress as a key (and perhaps the key) explanatory factor. Here I may respectfully part company with Anglin. I don’t think that people are telling us that things are moving too fast. I think in a lot of ways they’re telling us that they’re moving too slow. I subscribe to the Douthian argument that economic and technological stagnation (outside of narrow cones of progress), cultural conformity and replication, and the absence of a common project have contributed to a self-reinforcing mix of stagnancy, sterility, and drift. 

Douthat’s solution to what he calls “decadence” is a combination of divine intervention and renewed technological progress (“So down on our knees—and start working on that wrap drive.”). 

Maybe he’s right. But either way, these are the precise questions that we ought to be asking before we consign a generation or two of young Canadians to an uninspiring and unfulfilling future. 

Toronto Maple Leafs center Auston Matthews (34) celebrates his goal with Max Domi (11), and TJ Brodie (78) during the third period of an NHL hockey game against the New Jersey Devils Tuesday, April 9, 2024, in Newark, N.J. Bill Kostroun/AP Photo.
This might finally be the Maple Leafs’ year

Today marks something far more important than politics or public policy: it’s the start of the NHL playoffs and the Toronto Maple Leafs’ elusive search for their first Stanley Cup since 1967.

George Will likes to say that he writes about politics to support his baseball habit. I can relate. The only job that I can envision leaving The Hub for is really any role with the Maple Leafs, from team president to the guy who fills the water bottles.

I’ve loved hockey ever since I can remember. I played a lot as a young person—though not particularly well. I recently wrote about my playing days, including the occasional fight, for Cardus’ Comment Magazine. You can find my essay here.

Will also often says that at an age too young to make life-shaping decisions, he had to choose between becoming a Chicago Cubs fan or a St. Louis Cardinals fan. Most of his friends became Cardinals fans and grew up cheerful and liberal. He chose the Cubs and grew up a gloomy conservative.

Again, I can relate. Being a Leafs fan is good training for a conservative. It’s a steadfast lesson in low expectations and the inherent fallibility of man.

But I’m a North American conservative so I’m susceptible, however wrongheaded, to a unique continental optimism. I can’t help but succumb against my better judgment to a quixotic hopefulness.

No matter how hard one tries, the Leafs invariably tempt you into believing that this year is different. Last year’s first-round win against the Tampa Bay Lightning set off those feelings for me. The swift second-round defeat to the Florida Panthers caused a precipitous fall back to reality.

This season I’ve once again watched most of the games. I began the year determined to protect myself from inevitable disappointment. But somewhere along the way, perhaps due to Auston Matthews’ 69 goals or the group-think of my hockey chat groups (yes, there are two), I’ve come, at an almost sub-conscious level, to believe that this might be the year.

If so, I’ll need to bring my boys to Toronto for the parade because even though they’re only one and three years old, there’s a good chance that it won’t happen again in their lifetimes.

I suppose this is a long way of saying that if I’m a bit distracted in the coming days (and hopefully weeks) it’s because I’m focused on my real passion: hockey. Hopefully, politics and policy will cooperate and take a break for a while.

Until then, Maple Leafs forever!