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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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