Opinion: Do capital-gains taxes really matter that much to Canada's economic well-being? - The Globe and Mail

Open this photo in gallery:

Prime Minister Justin Trudeau, Finance Minister Chrystia Freeland and cabinet ministers hold the 2024 federal budget before tabling it on Parliament Hill in Ottawa, on April 16.Justin Tang/The Canadian Press

Kevin Milligan is professor in the University of British Columbia’s Vancouver School of Economics. He regularly advises the federal cabinet, including on capital-gains tax policy.

Canadians are engaged in a lively debate about the proposed increase in capital-gains tax on individuals with more than $250,000 a year in gains.

For companies, this increase is on all capital gains, not just those greater than $250,000. Many people voice concerns about the potential impact of a capital-gains tax increase on investment and productivity.

But how much does this increase matter?

To pin Canada’s economic well-being solely on tax policy misses the bigger picture. Economic growth and productivity gains are what will sustain Canada’s prosperity, and that should be our economic goal.

If tweaking tax rates is the only policy idea we have to improve our position after a generation of low productivity, I fear we’ll waste a generation of time – just as this country has done before in seeing productivity decline over the years.

To expand on this argument, we first have to dig into what problem the capital-gains tax increase is trying to solve, and how much capital-gains tax rates matter to our productivity problems.

A lot has been said about what is behind the capital-gains tax hike. But, at its heart, the premise is simple: There has long been a lack of balance between different ways of taxing corporate payments to shareholders.

Companies can move their after-tax profits into the pockets of shareholders by paying dividends, all of which are further taxed. Or companies can buy back shares, which raises the price of outstanding shares. Under the old system, when shareholders sold stock and generated capital gains, only half of those gains were taxed. The government proposes to increase that inclusion rate to two-thirds.

One aim for the capital-gains tax increase is to balance the two methods. A well-designed tax system aims for balance in taxation across these different ways of moving profits into shareholders’ pockets or reinvesting them in the business. Otherwise, the tax system is interfering in corporate decisions – pushing companies to choose one capital structure over another.

We want those business decisions made on business grounds and not because one route is tax favoured. This is sensible and rational tax policy.

One question to critics concerned about the potential impact on the economy: Would the reverse, lower capital-gains tax rates, actually result in productivity gains? I’m skeptical.

Low productivity has bedevilled Canada for a generation through periods of high and low tax rates. Even if you think lower tax rates may improve productivity a bit, it’s hard to see from the past 25 years of experience that personal income taxation is going to solve our productivity problem.

If fiddling with tax rates won’t get us to higher productivity and better growth, then what will? Here are three ideas, all starting from the premise that we should build out from what already works.

First, we need more corporate investment to make our people and economy more productive. We know what works is to have tax incentives close to the investment decision. We should extend and expand the soon-to-expire accelerated depreciation measures that lower taxes on firms only when they invest.

Second, Canada’s biggest resource is its people. Scale matters and we can build on Canada’s success at developing newcomers into productive citizens. We should continue to scale up our population at a sustainable pace – ensuring newcomers have access to affordable housing and the best education. With shrinking populations across Europe and Asia, being a beacon for young and ambitious newcomers is a Canadian advantage we should never stop embracing.

Finally, we need Canadian firms that can generate opportunities to flourish. Young engineers don’t move to Seattle or Silicon Valley because of the tax rates; they seek opportunities to work with world-class companies building exciting products. Mobilizing more forward-looking industrial hubs in Canada requires public and private investments that work together to generate opportunity.

An example makes these ideas concrete: Consider the University of Waterloo. Billions of dollars and hundreds of thousands of jobs have flowed out of the decision to start a new university in Waterloo 67 years ago.

The university wasn’t launched because of low capital-gains tax rates. The university was born because regional business leaders collaborated with local and provincial governments to build on and push forward the region’s historic success in manufacturing industries. It worked, and we all have benefited from the technology hub generated by that smart investment.

Keeping capital-gains taxes misaligned with the rest of the tax system doesn’t solve our productivity problem. Instead, better growth performance requires us to focus on investment tax incentives where they matter, growing the scale and depth of the Canadian population’s productive capacity, and building out hubs of industrial success.

Adblock test (Why?)

Opinion: Do capital-gains taxes really matter that much to Canada's economic well-being? - The Globe and Mail
Read More