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Jake Fuss: Don’t believe the spin. Trudeau’s capital gains tax hike hurts Canada’s economic well-being 

Commentary

Minister of Finance Chrystia Freeland speaks about changes to the capital gains tax inclusion rate, during a news conference in Ottawa, June 10, 2024. Justin Tang/The Canadian Press.

In a recent Globe and Mail column, UBC Professor Kevin Milligan said the federal government’s recent capital gains tax increase will not make much of a difference to Canada’s economic well-being. But this view ignores the obvious negative consequences of the tax increase.

In its latest budget tabled in April, the Trudeau government increased taxes on capital gains for all businesses and for individuals with more than $250,000 in annual realized gains.

According to Milligan, critics of the tax increase wrongly pin Canada’s economic growth prospects entirely on tax policy. Instead, he argues we need more business investment, a greater focus on developing newcomers into productive citizens, and more industrial hubs in Canada.

While he’s correct that tweaking tax rates to improve productivity is not a silver bullet, taxes remain an important piece of the puzzle. For instance, raising capital gains taxes will deter business investment in the Canadian economy and chase away capital we need for new equipment, machines, and technology that drive innovation and allow our workers to become more productive because, by definition and design, the tax hike reduces returns on investment. In addition, investors will now be less likely to sell their current assets and redeploy their capital to more productive uses in Canada.

In other words, by increasing taxes on capital gains, the Trudeau government will disincentivize both re-investment and new investment, thereby stifling economic growth, which was already waning. Shouldn’t we pursue policies that make our economy more productive and avoid policies that make us less productive?

Unfortunately, Canada is already uncompetitive on personal income tax rates compared to other advanced countries, especially the United States. Despite claims to the contrary, tax rates do have a substantial effect on a country’s ability to attract and retain high-skilled workers (i.e. engineers) crucial for entrepreneurship, job creation, and productivity. While taxes are only one of many factors that people consider when choosing where to live and work, they remain a crucial determining factor. A deep well of economic research suggests that high-skilled workers are especially sensitive to taxes and are quite mobile, tending to locate in lower-tax jurisdictions.

Moreover, although Milligan is correct that Canada needs more business investment to improve economic growth, his proposed solutions don’t go far enough. Expanding accelerated depreciation—that is, lowering taxes on firms only when they invest—at the margin would likely improve our ability to attract certain investments. But why stop there? Why not reduce tax rates significantly on businesses and capital gains to attract investment in Canada? Expanding accelerated depreciation alone is not enough to offset our productivity challenges. We’ve seen business investment fall off a cliff recently in Canada even with some accelerated depreciation measures in place. We should be bolder with reforms and go much further rather than tinkering around the edges.

Rethinking how we design business taxes, for instance, could generate more investment in the economy. Economists Jack Mintz and Trevor Tombe have suggested adopting Estonia’s system, which exempts profits reinvested in companies’ operations from taxation. Put differently, taxes are only applied when profits are distributed to shareholders. This would incentivize greater investment in technology, machinery, and equipment.

Other ways to improve productivity include reducing excessive regulations, eliminating interprovincial trade barriers, opening up competition in the economy by removing key government restrictions and protections, and balancing the federal budget to provide greater certainty about future taxes for investors and entrepreneurs. With its record-spending levels and string of budget deficits, the Trudeau government has crowded out private-sector investment and deterred investment by creating uncertainty for investors about future tax increases.

Make no mistake, raising capital gains taxes will hinder the Canadian economy. And we need bold policy reforms to solve our broader productivity challenges. A complete review of the tax and regulatory system is a good place to start. Raising capital gains taxes is not.

Jake Fuss

Jake Fuss is director of fiscal studies at the Fraser Institute.

Geoff Russ: Forget the ‘post-national’ nonsense. We have a culture and heritage worth celebrating, Canada

Commentary

A young girl waves a Canadian flag during Canada Day celebrations in Vancouver, B.C., July 1, 2017. Darryl Dyck/The Canadian Press.

July 1 is Canada’s birthday, a day to recognize the values and ideas that drove Confederation in 1867 and have endured to our times. This recognition rightfully clashes with Prime Minister Justin Trudeau’s proclamation that Canada was the world’s first “post-national” state, and possessed neither a “core identity,” nor a “mainstream.”

The progressive Guardian newspaper opined in 2017 that Trudeau’s vision, which it called the “Canada experiment”, presented a new model for nationhood. In the subsequent years, that experiment has demonstrably failed in a dramatically changed world, in which the importance of a strong, unifying Canadian identity is more vital than ever.

During one of Jason Kenney’s last great speeches in the House of Commons as an MP, he eloquently rejected the post-national vision of Canada and praised our inherited values and traditions. Elaborating on these points, Kenney spoke of the rule of law and equality before it, as well as equality of opportunity, which did not emerge by accident.

It was not the first time that Kenney publicly espoused those same ideals, such as in 2017 on the eve of Canada’s 150th anniversary at an event organized by the Cardus Institute.

“Canada 150 will be a hopeful confirmation that responsible government, representative democracy, widespread religious, political and economic liberty, unprecedented material prosperity, unity in diversity, linguistic harmony, that all of this, which we modestly call peace, order and good government, can endure generation after generation,” Kenney articulated.

It’s a message that’s much needed in our current moment. Democracies are being morally, politically, and economically challenged by authoritarian states on a scale most young Canadians have never experienced. The world is repolarizing at a faster rate than most people ever expected, at a time when the vision of globalization has stalled.

Canada needs to set itself apart from the non-democratic world with an identity that can weather the homogenizing effects of globalization and embody both culture and prosperity.

Good government means sound economic stewardship. The opposite has been true in recent years. This must change, more than anything else, and doing so would be a fulfillment of one of the many spirits that animated Confederation.

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