More capital gains taxation won't help Canada, says Fraser Institute

Report argues that traditional method of income calculation 'inflates' role of rich Canadians

More capital gains taxation won't help Canada, says Fraser Institute

The debate around fair-share taxation isn’t new, but it’s gained new life and urgency in the wake of the COVID-19 pandemic crisis.

Whether one looks at business closures, debt, savings, or other economic measures, there’s been a near-unanimous conclusion that the economy is going through a K-shaped recovery – and more must be done to solve the worsening problem of inequality.

In line with this, the federal government has indicated a renewed interest in raising the tax on capital gains. The fundamental reasoning, as articulated by voices from the political left, is that a greater share of the economic costs should be placed on the shoulders of wealthy individuals who are better able to afford them.

But according to a new paper from the Fraser Institute, hiking taxes on capital gains won’t help.

According to the report’s authors, policy analyst Alex Whalen and Executive Vice President Jason Clemens, raising taxes on capital gains would actually hamper efforts to reignite the Canadian economy, as higher taxes “raise the cost of capital and discourage entrepreneurship.”

The two also argued that rather than having a competitive advantage, Canada actually falls below average in a ranking of industrialized countries with respect to taxation of capital gains. Based on data from PWC and KPMG, Whalen and Clemens determined that Canada’s current system of capital gains taxation puts it in 23rd place out of 36 countries; raising the capital gains inclusion rate to 75% would push Canada further down to the 32nd spot.

And the widely held belief that the rich represent a large portion of capital gains tax-payers, they asserted, stems from the fact that most analyses include capital gains in measurements of income, “which inflates the income of people claiming capital gains.”

Excluding capital gains from income calculations, they determined, would reduce the share of capital gains taxes paid by individuals earning more than $150,000 a year from 77.4% to 48%. By the same token, the share of capital gains taxes paid by those earning less than $100,000 rises from 12.8% to 38.4% when such gains are not counted toward income.

“The analysis of who actually pays capital gains taxes, research on the consequences of higher capital gains taxes, and Canada’s current lack of competitive advantage all point to the same conclusion: capital gains taxes should not be raised, and in fact, Canada would benefit if taxes on capital were lower,” Whalen and Clemens concluded.

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