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“Let us amuse ourselves,” one of my University of Toronto economics professors began his lecture (a decade ago, when I was an undergraduate student), “by discussing tax incidence for two hours.” It is a shame there were only a few dozen people in that class. If more Canadians were afforded two hours of instruction in tax incidence, the Liberals would have a harder time getting away with the nonsense they’re peddling about how their capital gains tax hike will only cost the super-rich.
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In its latest announcement on the capital gains tax increase, the Liberal government presents as a “quick fact” that it’s “increasing capital gains taxes on 0.13 per cent of Canadians, in any given year.” There are three problems with the 0.13 per cent figure. First, it is misleading; second, it is incomplete; and third, it ignores tax incidence, which is the concept that the economic burden of a tax falls on different people — in fact, on very many more people — than simply those who face a higher tax bill.
Let’s take the three problems in order. First, the 0.13 per cent figure is misleading because of the phrase that follows: “in any given year.” The taxpayers who are part of this 0.13 per cent in one year are different than the taxpayers captured in this group in another year. For many Canadians, reporting an annual capital gain in excess of $250,000 is a once-in-a-lifetime event — or an immediately-after-lifetime event if the capital gain threshold is triggered when a deceased person’s assets are liquidated.
This means that even if only 0.13 per cent of Canadians pay this higher tax rate every year, a much greater percentage of Canadians will be hit with this tax hike over the course of their lives. Economist Jack Mintz crunched the numbers and concluded that, “As a share of Canada’s tax filer population, those impacted by the new capital gains proposal on a lifetime basis is 1.26 million or 4.3 per cent of tax filers compared to the budget estimate of 0.13 per cent.”
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Second, the 0.13 per cent figure is incomplete because it excludes corporations. As the Liberals estimated in budget 2024, approximately 307,000 corporations (again, in a given year) will be subject to the tax. About 6,000 of these are likely to be publicly traded (public companies make up around two per cent of Canadian corporations), so many Canadians will effectively be subject to the higher capital gains tax through their investments, including pension plan assets.
Then there’s the approximately 301,000 private corporations, many of which have multiple owners, such as partners or family members, so even excluding exposure to publicly traded corporations, many Canadians will be hit by the capital gains tax hike through their investments. “Overall,” Mintz estimates, “4.74 million individual investors in Canadian companies will be affected, representing 15.8 per cent of all filers.” Or more than 100 times the Liberals’ stated figure of 0.13 per cent.
This brings us, thirdly, to the concept of tax incidence, of which students will learn in a good economics class but which the Liberal government would like us all to ignore. A well-known example: on paper, corporate income taxes are paid by shareholders, but in reality the economic burden of the tax falls largely on workers in the form of lower wages. Corporate income taxes discourage investment, thus reducing labour productivity and the number of businesses bidding for labour.
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No differently, the Liberal government’s capital gains tax discourages business investment and will have negative effects on workers far beyond those who earn high amounts of capital gains in a given year. Business investment has already fallen in alarming fashion since the Liberals took office: from 2015-Q3 to 2024-Q1, real per capita investment is down 13.9 per cent. A capital gains tax hike that distorts investors’ decisions to favour present-day consumption over long-term investment will make this trend even worse.
The incidence of the Liberals’ capital gains tax hike will fall on all of us, not just the 15.8 per cent (Mintz’s estimate) who are directly affected, or the “0.13 per cent of Canadians, in any given year” that the Liberals claim. For ordinary Canadians, learning about tax incidence for two hours could be a profitable and amusing activity; being whacked by a capital gains tax that the Liberals say will only affect the super-rich, not so much.
National Post
Matthew Lau is a Toronto writer.
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