Sunday, May 16, 2010

Potential Liberal Policy: Reducing the Capital Gains Tax

In light of the upcoming Liberal Policy Convention in Vancouver I will be posting potential policy proposals for criticism. All comments are welcome and encouraged.

POLICY RESOLUTION – Reducing the Capital Gains Tax

WHEREAS economic growth depends on the quantities of available inputs, such as capital and labour, and the productivity of those inputs; and investment in capital is crucial to economic growth because it increases the amount of capital available to the economy and enhances labour productivity;

WHEREAS many economists and financial advisers have identified the capital gains tax as a significant disincentive to the supply of risk capital for business start-ups and for small and medium-sized enterprises;

WHEREAS a lower capital gains tax would improve Canada’s international competitiveness, enhance the mobility of investments, create more wealth, accelerate business and job creation, and enhance economic activity and productivity;

WHEREAS the long-term capital gains tax rate in the United States is lower than Canada’s and the Canadian Standing Senate Committee on Banking, Trade and Commerce in its May 2000 report recommended that “international competitiveness be the criterion guiding the choice of a capital gains tax regime, and that the federal government be prepared to lower the tax until the criterion is met” adding “A tax rate even lower than the American rate is more appropriate,”;

WHEREAS a 2004 Department of Finance working paper from Baylor and Beausejour suggests that reducing the taxes on personal capital income produces proportionally higher welfare gains; specifically for every dollar spent in reducing the capital gains tax, there would be a gain in welfare equal to $1.30;

BE IT RESOLVED that Canada becomes more competitive internationally and increases general welfare and economic efficiency by reducing the inclusion rate of the capital gains tax from 50% to 35%.


This policy will be debated against one that only seeks to eliminate the capital gains tax on treasury stock. I would be interested in knowing which policy would be more preferred.


Anyong said...

What a wonderful place for YOU to bring up the fact that non baby boomers who are now retired and through no fault of their own, are trying to subsist on OAS in this country. It needs to be increased to meet a lving wage standard, and, the Liberal Policy will be to try and reduce Capital Gains Tax......are you talking about the wealthy of this country by any chance? said...

Anyong, thank you for the policy idea of raising the Old Age Security Program in Canada. I will bring that up at my riding's policy discussion this Thursday.

As for reducing the Capital Gains Tax, it's about making our economy the most efficient and beneficial as possible. All taxes negatively impact the economy, but some are less damaging. If we could have a tax system that is the least damaging it's good for all Canadians. Especially when you consider how many Canadians own mutual funds, stocks, and property that would benefit from a reduced capital gains tax.

Are there any specific problems you have with reducing the capital gains tax?

Anyong said...

Canada's capital gains tax was introduced in part to finance the growing costs of Canada's social security system and to create a more equitable system of taxation while Pierre Trudeau was Prime Minister in 1972. Capital Gains then was at 50% but then raised to 75% in 1990 and lowered to 66.6% in 2000. Very few lower income Canadians will see a direct benefit from your proposed cut, as most don't own stocks outside RRSPs, and most don't have a cottage or second home (the other major asset that typically attracts capital gains taxes on its sale). If Capital Gains is lowered to 35% from 66.6% and not 50%, what will happen to OAS in this country and other social programs. We already know that 60%of women in this country who are receiving only OAS are living below the poverty level at present. They have been tax payers all their lives and most were stay at home moms. How can that be justified in a country like Canada? We certainly don't treat our elders with respect if they are living in poverty. In countries like Norway and Sweden, the elderly are provided with a living pension. Not every pensioner retired at the moment had available to them what baby boomers have had and family in Canada has become fragmented. Thank you for your reply.

Read more:

Government figures from 1997 indicate that 45 per cent of total capital gains tax breaks went to individuals earning more than a quarter of a million dollars a year.

Read more: said...

Anyong, the inclusion rate of the Capital Gains Tax was further reduced in 2001 to 50%.

From your argument it appears you are against the tax reduction just because you are the opinion it only benefits rich people. I think you are missing the point of this policy resolution. It is not to benefit the rich, it is to reduce inefficient taxes.

The Department of Finance and various research bodies all state the capital gains tax is one of the worst taxes, it not only takes money out of the economy, it decreases investment. With a lower Capital Gains Tax there will be more investment, more start-ups, more productivity, and a higher GDP.

If you are still against this tax reduction, I would point out that there's nothing stopping an increase in higher income earners income taxes.

Anyong said...

I may sound like I am against which is not the case. My question is, how will social programs in this country be supported if the reason Capital Gains was instituted was to support such programs? That is what I want to understand. What will be your proposal since you have said you will bring up the problem of poverty among OAS pensioners? said...

Anyong this policy as it is currently written does not specify how social programs will be afforded, however there could be discussion that including funding measures would strengthen the policy and changes could be made.

I would prefer not attaching a secondary policy to this resolution because it would not only add controversy it would limit the funding possibilities.

The Canadian Senate Committee in 2000 cited that in the US a cut to their Capital Gains Tax actually increased revenue in the short and long term, however they added such a result cannot be extrapolated to Canada.

The broad options to cover a cut in the capital gains tax are:
-cutting spending
-increasing other less harmful taxes, like consumption taxes

Of the two I'd prefer trying to cut spending but if that can't work then I'm all for the latter.