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The Canadian government is increasing the capital gains tax for the relatively well off. They claim it only affects 0.13% of Canadians, but this is a lie, since capital gains are extremely lumpy, mostly affecting estates. A much larger share of the population will be in that 0.13% at some point in their lives. The tax will affect a lot of middle class people, distort the economy, and, as I'll explain at the end, redistribute wealth to foreigners.
Currently, 50% of capital gains count towards your taxable income and so you'd pay half the marginal rate, which tops out at between 44.5% and 54.8% depending on which province or territory you live in. The new rule would raise the portion of capital gains that is taxable from half to two thirds for capital gains over $250,000. Primary residences are exempt and it doesn't affect tax protected savings accounts like RRSP and the relatively new TFSA. Most people don't save enough to have savings outside of these accounts and their primary residences, but you certainly don't need to be rich to do so. You could be someone who chose never to own his primary residence and increased savings in the stock market instead. You could own a cottage, to which the capital gains tax applies when you either give it to your children or when you die. Lots of middle class people will be affected.
The capital gains tax is actually a very unfair and even absurd tax. You invest after-tax income from your salary and then when you realize a gain on those savings, even if it's just enough to keep up with inflation such that you have no real gain, you pay taxes again. Someone who is equally wealthy but doesn't save his income for as long would pay less tax. So it taxes savers more than spenders and discourages investment. There are further distortions due to the fact that primary residences are exempt, which incentivizes people to save by investing in their primary residences, inflating property values and making housing more expensive.
This brings me to my last point. The Liberals are far behind the Conservatives in the polls and an election is at most a year and a half away. The main issues tanking their popularity are housing and immigration, particularly for young people, who see a connection between those two issues. Older people don't care so much and are happy to see their property values rise (property values have risen far out of proportion to incomes in recent decades). However, this new tax rule is being promoted in the name of generational fairness.
This makes no sense. The Liberals have dramatically increased the immigration rate, which certainly has inflated property values. There are good arguments to defend this, among them that the higher property values are a net gain for Canada since the vast majority of property is owned by Canadians and most Canadians are homeowners. It really only hurts renters whose parents aren't homeonwers and therefore won't inherit that wealth. Most young Canadians, even if they rent, have parents who are benefiting from this and therefore shouldn't really complain (although they do). Now, the government is doing the one thing that messes this up: they're redistributing much of those gains to the younger generations who include, in very large and increasing numbers, immigrants and their children. What is the point of inflating asset prices with immigration if you're just going to redistirbute the gains to those immigrants? If your goal is to be maximally charitable to immigrants, fine, but this is not in the best interests of Canadians.
The tax increase does exempt primary residences, but not other assets like secondary residences, and the reason for this tax increase is to fund the enormous increase in spending on things like subsidies for new home buyers and affordable housing. The deficit has ballooned to $40 billion dollars under Trudeau and I think the government is actually starting to get desperate and trying to think of ways to raise revenue without spending political capital. Corporations and trusts will also pay this higher capital gains tax. This will reduce business investment. The tax seems calculated to actually raise a fair bit of money while minimizing the number of people who think they'll have to pay it.
Capgains taxes are fine, and even desirable if you want to lower or stabilize the gini coefficient. Rich people tend to get most of their money through their existing wealth, not through directly working which would be subject to income taxes. It's the closest thing to a tax on wealth that most societies can really achieve. A society that lets wealth accumulate unhindered ends up looking like France in the Belle Epoque period, where dynasties of the ultra-wealthy control almost everything.
You can say something similar for a sales tax, where post-tax money is taxed again, and if inflation happens then the absolute value of the tax increases. None of this makes either tax "unfair" or "absurd".
I do agree that trying to fix the problem by subsidizing housing for the young is silly. It's treating the symptoms instead of the cause, which is almost certainly NIMBYs and zoning restrictions like it is in the USA. But those are typically local issues that the national government doesn't have jurisdiction over, so they try to seem like they're "doing something" by just throwing money at the problem.
It's really a scheme to tax old people and give the benefits to younger people, which isn't the worst idea but the underlying issues of the housing crisis really do need to be resolved as well.
The traditional economics is that taxing capital doesn’t raise any net tax revenue.
A short summary is all this stuff goes thru the capital markets. A country with high saved wealth has more money sitting in financial assets. A huge amount of financial assets causes money to bid up the price of financial assets. The reverse of a securities price is its yield. Hence a lot of saved assets ends up leading to things like lower real interest rates (or negative real rates). So cheap mortgages and cheap government borrowing. What the government gains in tax revenue is offset by increases in their interest expense. All sums up to 0 net government revenue.
This doesn't seem right to me at all. Obviously there are distortionary effects, but you're effectively saying the laffer curve reaches its apex at 0%, which doesn't jive with traditional economics.
Yes, a higher capgains rate will theoretically lead to somewhat higher interest rates, but I find it exceedingly unlikely that it would perfectly cancel out especially when marginal investors decide to spend their money instead, leading to an increase in revenues through consumption taxes.
Capital gains (at least as currently taxed) are extremely sensitive to tax rate because the taxpayer can choose to sell or not sell (ie it isn’t like income). So if you have a higher capital gains tax you likely will have less gains because taxpayers obtain a better ROI leaving their pre tax investment in asset X instead of their post tax investment in asset Y.
As a practical matter, a lower CGT is one where lower taxes might actually be revenue raising.
That just kicks the can down the road a bit. They eventually sell if they want to get access to the money to do other stuff with it.
What rich people do is take out a loan using the asset as collateral. So long as the asset appreciates faster than inflation, you come out ahead and get to access the money without selling (I believe this is also not considered income in most jurisdictions).
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The lock in effect is studied and is real. Again, the higher the capital gains rate the higher ROI to stay invested in the same asset.
Think of it this way. You invest 100 dollars in Apple stock. It appreciates to 150. You could sell and pay 10 of tax on the gain leaving you with 140 to invest. Or you could keep 150 exposed to Apple. Provided the return on that 10 outstrips the ROI on the 140 invested in non Apple stock, I keep my money in the Apple stock.
Also there are strategies to monetize without triggering gain (eg leverage, death).
I don't deny the lock in effect is real and present to some degree, but it's not a way to avoid taxes, only to delay them a bit. Owning stocks is not an end unto itself for most people, they're a vehicle to get returns, either through dividends or appreciation. So yes, they can own the Apple stock for longer, but eventually they'll sell which triggers the full effect of the tax.
The death loophole is bad and should definitely be closed. I'm not sure how leverage could be used to avoid taxes, but it should probably be closed as well.
The less frequently you sell your assets, the lower the effective tax rate due to capital gains tax. Also, if it's something that generates a return other than through appreciation (e.g. a dividend paying stock or real estate), by holding to it longer, you realize more of the value in a form that doesn't count as a capital gain and so you pay less tax.
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Leverage just enables you to get the cash today and pay tax much later (or maybe never with death). Delaying taxes over a long enough time period is effectively avoiding taxes from an NPV perspective.
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It’s not a laffer curve element. That’s for raising tax revenue alone. It includes other indirect costs like government interest costs.
https://www.thebigquestions.com/2011/04/18/the-man-who-cant-be-taxed/
This thought experiment was popular on econ blogosphere back then. It seems roughly right to me.
Now someone above mentioned they consume capital gains and quit working. The story gets a bit different then since higher cap gains taxes or full consumption would lead to him entering the labor market producing more goods and services for others to consume.
But in general without causing a change in behavior (rich consuming less, getting people to work more) there would be no net gain in government fiscal position.
Elon Musks for example can’t be taxed. If you took $100 billion from him it’s not changing his lifestyle. Just numbers on a bank account. He would still work and he consumes so little compared to his net worth consumption changes would be meaningless.
That link you shared is an exceedingly strange scenario, where a man with $84 million never spent it. I can't check the link to the article it was responding to because it was dead, but people with $84 million usually don't tend to live a life of subsistence. When people make money through labor or capital, they usually do so with the desire to use it on something, be it material possessions for themselves, bequeathments for their heirs, or chasing things that are a little less tangible like power and influence.
I generally like Elon for what he did to Twitter, but the dude owns several houses, an entire fleet of private jets, and a lot of other luxury items. The bigger issue would be if he would pass down his wealth to his kids to create a Musk Dynasty with the wealth continuing to expand further and further. To some degree you could say Musk deserves his money since he made a large chunk of it through his own labor, but his kids wouldn't have the same claim.
It’s an idealized thought experiment. But I would say it’s largely true for Buffett, Musks, and a few others. You wouldn’t be taxing them directly. Carnegie is an interesting example. You wouldn’t for the most part be taxing him, but what you would have taxed is what he did with the money. The government would get more money and it would be real but what your taxing is what he did with his money which is buy a lot of libraries, science, and cultural centers in the US. Maybe that is a net gain. But you are not taxing the rich guy.
I do not believe Musks owns a home anymore. He probably does own a private jet or two. But his consumption would be way below his means. Any taxes on him isn’t going to change his jet ownership so no consumption change. You would be taxing something else besides Elon Musks. Not sure what it is.
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Very good comment and I agree with most of your points here. I would say that NIMBY and zoning isn't all there is to it, it is simply very expensive to just build a house now, even if you already own the land and act as your own general contractor.
Stringent code requirements are part of it, you can't just throw up 4 walls and roof anymore. You would be hard pressed to build your own home for less than $300 a square foot if you wanted any kind of fit and finish, so we're talking 300k for a new 1,000 sq foot home and garage.
Until we have a much cheaper way to make quality housing we are always going to be in a "housing crisis". That being said, 75% of the people in my state own their own homes, I think the "housing crisis" is overblown. Shit is just expensive now, there are too many people, and they all want to live in the same places. If people want cheaper homes encourage your kids to become carpenters/plumbers/electricians willing to work for low wages. Getting a door replaced is like 3k these days. Everyone wants a freestanding home next to mountains, the ocean, lakes and a major metro with good weather, they can't all live there.
This doesn't make much sense to me. Why would construction costs be rising so much? Did we run out of trees or something? Are safe modern materials (like not using asbestos and lead-based paint) just massively more expensive than the alternatives? I could see labor costs rising to some degree due to the baumol effect, but that doesn't come close to explaining the total rise.
My naive guess would be mostly wages. None of the post-70s technology has really mitigated the need for a bunch of men to stand around in the sun and lift heavy objects. The same forces which push of cost of living up mean those guys won’t do it for $7.50/hr.
Is there a worker supply shock after fifteen years of collapsed demand? That is enough time for a good number to think about getting out of the business.
If an economist told me permitting or materials costs had ballooned since 2008, I’d believe that too, I suppose.
I don’t know about permitting- in my area you can usually get away with just not pulling a permit on anything and hoping no one notices- but materials costs skyrocketed during the pandemic supply chain disruptions and only lumber really came back down at all- concrete, paint, asphalt, etc is all ludicrously expensive. It’s also hard to get labor but that has to do with the reliability issues from hiring drug addicts and illegals as much as with the post-pandemic labor shortage.
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I am not a construction worker. But I have been a construction worker(pre-pandemic), work in a trade that is sometimes categorized as construction, my grandpa was a GC who retired recently, and I’ve overseen minor construction projects recently. A few points:
Construction workers in general have always been unreliable people who have lots of no call no shows, sometimes for months at a time, waste materials, do things other than the ones they say they’re going to do when not supervised, and just disappear for long stretches at a time. Also lots of them do drugs, because the industry has never tested, so there’s plenty of them with what the industry refers to as ‘crackhead tendencies’. This has gotten worse with the supply crunch for blue collar labor, and ‘crackhead tendencies’ make already-rising labor costs rise exponentially because the guy demanding to be paid early because he’s out of cigarettes(he was paid on Friday and ran out of money Saturday morning) now has a lot more negotiating power than he used to.
Lumber rose and then fell to where inflation would predict it should be. Everything else stayed high, and concrete in particular is ludicrously expensive right now. The usual construction industry explanation is that Amazon buys up all the supply for building warehouses.
In addition to the labor issues I already noted, construction is one of the least pleasant jobs that’s widely available. In a general blue collar labor crunch construction will see a particular supply drain, which introduces lots of delays that the customer pays for.
Construction costs rise partly because construction foremen and contractors have no incentive to keep costs down- everything just gets billed back to the customer so nobody cares. Yes, that means the customer eats the bill for lots of waste, dishonesty, and sometimes theft(remember, plenty of the workers are literal crackheads).
Put all that together and it’s not really a mystery why construction is particularly affected by the post pandemic inflation and enshittification.
I was talking to my lawyer friend about construction workers, and he has a few construction worker clients and he says they're all on meth, so yeah, this checks out. I always kinda envisaged them as only slightly classier than a depressed Walmart worker, so it's good to confirm that with people who come into contact with them, as I certainly don't do so often.
This is just crazy to me. Such a moral hazard that nobody I've heard really talks about defending against.
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"Enshittification" doesn't mean "turned to shit". It means "turned to shit because of user, and later business, lock-in".
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It is a lot of baumol effect. There is simply not much more productivity to be squeezed out of the trades if we insist on high quality stand alone housing. People have been trying for decades with manufactured housing or building off site. Nothing seems to bring costs down. Housing, the way people want it, is too bespoke and every single housing lot is different and has different challenges. Building a nice modern house requires a dozen specialized trades to all work in concert in the same space and at specific times. Or one very dedicated person building their own home over years and years. The non-labor inputs are also vastly more expensive than they used to be. A high quality gallon of paint is 80 bucks at the local ACE hardware store.
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A good econ piece for a good researcher would be to figure out why the costs of construction increased so much between 2019 to 2024. It seems like Texas could atleast print 3k sq ft at 500-600k new back then. With then older 3k sq ft homes going for 400k.
WFH killing construction costs doesn’t vibe right to me. Construction workers and lumberjacks aren’t the people afraid of COVID or the people who ever could do WFH. We have had general inflation probably totaling 20-25% but it still feels harder to build now.
I assumed the bump in construction costs around 2020 was due to increased demand for home renovation projects because people were spending more time in their homes and had fewer other things to spend money on. But that doesn't explain why they didn't go back down.
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A lot of it is experienced tradesmen are aging out and no one is replacing them. That is an even more serious problem where I live as we don't have any immigrant labor to replace them like they do in the south and southwest. I can also count on one hand the number of women I've ever seen on a jobsite doing manual labor, so that really takes half the population off the table for these jobs. Materials costs have doubled as well in a lot of cases. The prices went up during covid, and they never came down, lumber being the only real exception.
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And why would you want to cut the top off your economy?
To keep it from strangling the bottom. Some investment is good and necessary for a functioning economy, but letting it go unchecked creates inequality and other problems. I think for a starter that labor income and investment income should be taxed at the same rates.
Bezos's wealth does not cause anyone to be poorer; there's no "strangling" of the bottom of the economy by the top.
Bezos isn't stealing crusts of bread out of peoples' mouths, but there are a few direct problems like the rich usually being pro-immigrant for starters, as it lowers the cost of wages to make them even more money.
Then there's a lot of indirect problems, like the existence of the ultrawealthy causing a general sense of unease and unfairness. It's a lot like having a ton of unassimilated immigrants. There are some direct problems, but the bigger issue is the backlash it causes.
Oh, yes, that's certainly a problem that justifies taking away their wealth and giving what survives the process to those who complain. This is the sort of justification I'd expect from a straw villain in some Ayn Rand novel.
Compare it to the people who oppose immigration or the sense of "being replaced". One could sneer at them, say they should just buckle up and accept changing racial demographics without complaint, that their sense of being a "stranger in their own land" is stupid and dumb, and that giving into their demands is defacto giving in to racism. Indeed, many coastal leftist elites do some version of this, but we'd generally regard them as pompous and out-of-touch.
So it goes with inequality. We could say to a poor secretary "no, no, your rich billionaire boss needs to have a lower tax rate than you, because the way he makes his money is special and taxing it too highly would be unfair". Somehow I doubt they would be convinced.
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And that rate should be zero.
I personally like having things like roads and the military for protection.
Me too. Those two categories combined make up about 15% of federal spending. I could live without the rest of it.
If we reduced all federal taxes to 0% we could fund the roads and military with debt and cancel everything else. That would reduce the budget deficit by about 2/3.
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Paging @DuplexFields and his fairtax proposal.
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For the same reason as why you want to cut the top off your power economy by having rule of law and a constitution, presumably.
More pragmatically, historical precedent shows that if you don't the plebs eventually rebel and you have to spend a lot more resources on suppressing them, or actually just wind up being hung from the lampposts.
The analogy makes no sense. An absolute ruler is an absolute ruler because he has power over his subjects; he's directly taking away their autonomy. Elon Musk or Jeff Bezos being wealthy does not rely on making J. Random Janitor poorer.
How does it not? There is a bounded amount of things of value, and everything available for the use and consumption of Elon Musk is not available for the use and consumption of J. Random Janitor. Whether we directly confiscate Elon's land and redistribute it among the Janitor family, or reduce the number in Elon's bank account so that Elon's ability to bid and win in implicit or explicit auctions for things that the janitor also wants, making Elon poorer helps the janitor in expectation.
I suppose there's a bound, but there isn't a fixed amount of things of value, which is what your argument relies on.
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Are confusing poverty and inequality? I do not know any society in which the poor had it as well as in Canada before these taxes, yet would go on to rebel.
What's the evidence that absolute poverty is what matters, rather than inequality? Many uprisings happened in societies where the 5th-percentile poorest person was better off than the 5th-percentile richest person in some historical society that remained stable. It seems to be a common belief in many circles that humans are mostly motivated by relative status.
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A sales tax is a tax on consumption. A capital gains tax is a tax on capital. Taxing capital is taxing savings. It is not really taxing wealth, because an equally rich person who spends his money right away avoids it. It is actually easier to just tax consumption with a sales tax and then you can tax extreme wealth but in a way that is fair and doesn't discourage saving and investing.
The capital gains tax is especially absurd (compared to other taxes on capital) because it not only penalizes saving but also penalizes frequently selling assets, and the tax is on the nominal returns, not the real returns. If you invest in government bonds, your real tax after-tax return will be negative.
Scott Sumner is excellent on this subject and has written many blog posts on it. It's hard to pick the best one, but you should read a few. Here are some:
https://www.themoneyillusion.com/a-consumption-tax-is-a-wealth-tax/
https://www.econlib.org/capital-gains-nonsense/
https://www.themoneyillusion.com/income-a-meaningless-misleading-and-pernicious-concept/
Someone who spends their money by buying stuff gets hit by sales taxes, while someone who "spends" their money to make more money gets hit with capgains taxes. The two are symmetrical in that way.
There's nothing inherently "unfair" with taxing investments, as opposed to taxing something like labor income. I read all 3 of your links since they were short, and basically the only argument he presents for not taxing investments is that saving is intrinsically good, but he gives no real reasoning for this. Yes, some saving is good, but he wants to replace capgains taxes with massive taxes on labor income. So doctors and engineers would be hit massively harshly (or "unfairly"), while trust-fund kids would get a windfall. He's trying to smuggle a plan for the rich with vague notions of "fairness" and "saving good" without examining externalities related to high inequality or dynastic wealth. High inequality is just as acidic for the civil polity as massive unassimilated immigration is, so we should generally avoid it where possible.
Well that's just flatly not correct, as "government bonds" encompasses a range of investment vehicles including higher rate munis. Assuming you were talking about T-bills... it's still not really correct. Returns would depend on the prevailing rate set by the open market, the level of inflation, and timeframe. E.g. today the 30 year T bill is 4.77%, which is quite a bit higher than inflation.
I'm not generally opposed to adjusting capgains for inflation, as long as the total rate of capgains across the board doesn't change (it'd need to rise in other places to compensate). But the prevailing rates offered would likely decrease to the point where it was mostly a wash, and you were the same as before except with more complicated taxes where you'd need to calculate inflation rates.
He's not trying to smuggle a plan for the rich. Read the part where he advocates for a progressive consumption tax again.
He is explaining that there is no reason to tax capital gains if your goal is to reduce inequality. From the second article:
Your only answer that seems to be that they have different wealth, which he explains is not true, so what reason remains for taxing capital gains?
As for what is wrong with discouraging saving, he never says that saving is inherently good. He gives a very clear and specific reason for why it's bad to discourage saving.
This one may clarify a few things.
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And then gets hits by sales taxes anyway when he spends his money in the future.
Taxes on investment income distort the trade-off between present and future consumption in a way that neither taxes on consumption nor taxes on wage income do.
There's a superficial appearance of symmetry here, where it seems like taxes on investment income discourage investment and taxes on consumption discourage consumption, but the illusion goes away if you work through the math. The tax system really is set up in a way that penalizes saving and investing.
All taxes are distortionary. A few like carbon taxes or cigarette taxes distort in good ways, while most distort in bad ways. Taxing labor income is almost exclusively bad, since it promotes sloth and working less, while taxing capital gains is a mix. There's the bad aspect of discouraging investment along with the positive aspect of reducing inequality. The author is saying the current privileged mix of taxing investments less than labor income isn't good enough, that we should institute massive taxes on labor to reduce all taxes from investments to 0.
Taxing capital gains is not a way of avoiding taxing labour. The capital gain is a return on an initial investment that was earned with labour. Taxing it is taxing labour, just in a way that creates a deadweight loss by taxing someone who saves more than someone who spends. You get all of the deadweight loss of taxing labour and then some.
In my third link, Scott Sumner directly addresses the point about inequality. Taxing capital gains doesn't reduce inequality. The two brothers in his example are equally wealthy. But one chooses to invest his wealth and the other chooses to spend it. The fact that the one who invests it earns a capital gain does not mean he is wealthier. His brother had the same opportunity and didn't take it because he valued earlier consumption over later consumption. Claiming there is a difference in equality is just like claiming there is a difference inequality between someone who bought watermelon and someone who bought blueberries.
He's not saying that at all. You've completely misunderstood. You should read the articles more carefully because he directly addresses this kind of argument.
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Hate to be that guy, but land value taxation (or really taxes on anything that's inelastic in supply) doesn't have that problem. Probably the most compelling argument for it (plenty of arguments against it, as well).
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I have occasionally mused that a truly-progressive sales tax could be interesting: tax total expenditures up to, say, the median cost of living at one rate, and marginal expenditures above at a higher rate. This would probably need some allowance for amortization on bigger purchases. The idea being to tax the wealth when it's spent, and intentionally incentivising capital investments rather than conspicuous expenditures.
But it's a very wonkish policy proposal that would be hard to sell to the broader public, I think. And probably has quite a few details that would need ironing out.
It seems like a progressive sales would inherently require tying your identity to every purchase, which seems like a huge inconvenience and a tough sell from a privacy perspective.
Flat sales tax with a rebate partially solves it, although in practice you would need a horrible VAT system to stop people living off their employer tax-free (like the tech companies already do to some extent)
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Here is another proposal: https://www.themoneyillusion.com/tax-luxury-not-wealth-or-income/
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Possibly. I think you might be able to track net cash outflows, rather than purchases directly, to cover most of it, but that admittedly only works for people that use banks and would have trouble with people who get paid and pay in primarily cash. But the existing income tax system has those problems too.
You could also tax different products at different rates, depending on the income range that purchases them. Used clothes, lower rate; Teslas, higher rate; organic produce, higher rate; frozen veggies, lower rate. In theory you could kind of approximate the same effect. The biggest issue would be all the jockeying different industries would go for to be classified into the lower rate (why, of course this Hermes bag is purchased mostly by lower income people!)
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I guess a corresponding benefit could be dramatically reducing the overhead of a small business. But only in a fantasy world where all state taxes followed suit.
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