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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.
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.
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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