Ready for tax increases?

The last time Ottawa posted a budget surplus, the very first iPhone did not yet exist and Michael Jackson remained a living pop icon.

This tells you how much Canada has been in the red for a long time – around fifteen years, in fact. And as far as we can scan the horizon, it is impossible to see a return to budget balance.

Especially since for two weeks, the Trudeau government has embarked on a round of announcements which will add billions to the spending column of the budget which will be presented on Tuesday. Stuck, the liberals try to please everyone.

To please voters whose primary concern is the cost of living, they are releasing money for the expansion of the daycare network, for the creation of a national school feeding program or even for the construction of housing and the development of municipal infrastructure. To respond to their NATO allies, they are adding 8.1 billion over five years to the defense budget, which remains minimal compared to the expected efforts.

And for the New Democratic Party to keep them in power, they are laying the foundations of a national drug insurance program, unveiled in February, whose bill will amount to more than 10 billion per year, roughly the equivalent of ‘one GST point. There is no denying that a minority government is expensive!

All that remains is to know how the federal government will finance its growing interventionism. Except for the pandemic period, its spending has never been so high since 2000, as a proportion of the size of the economy (GDP).

In her budget statement last fall, the Minister of Finance, Chrystia Freeland, finally set budgetary anchors to ensure that public finances do not go adrift. But it will have great difficulty meeting its own targets, if we rely on the forecasts of the Parliamentary Budget Officer¹.

Unless you cut other expenses. Or unless we increase taxes… which is never very popular when you want to rise in the polls.

However, it will be necessary to think about it. Public accounts are not a fairy tale. There is no magic: you cannot implement large-scale social programs without ever having to take out your wallet.

Ottawa could take inspiration from the government of Quebec, which announced, during its last budget, a complete review of its taxation.

If we want to replenish the coffers, we could in particular consider the idea of ​​taxing capital gains more, that is to say the profit made when we resell an asset which has increased in value, such as shares or a secondary residence (the main residence is completely sheltered from tax).

The Coalition Avenir Québec and the Parti Québécois proposed it during the 2012 electoral campaign. The Commission for the Review of Quebec Taxation advocated for this in 2015. But Quebec cannot act alone, for reasons of ‘harmonization. Ottawa should get the ball rolling.

Currently, the tax authorities only tax half of the capital gain. For example, if you resell $500 of the stock you paid $400 for, you will be taxed on half of the $100 gain, so $50, which will result in a tax bill of $26, at the tax rate maximum of 53%.

However, the partial exemption from capital gains disproportionately benefits the better off: 82% of gains are generated by the richest 10% and 57% by the top 1%, underline the authors of a recent open letter which advocate full taxation of capital gains².

For his part, tax professor Luc Godbout suggests in a pre-budget memorandum to tax three-quarters of the capital gain, which would have the advantage of offering almost the same treatment as on dividends.³.

In some countries, such as the United States, the capital gains tax varies depending on the length of ownership, to recognize the fact that inflation is an integral part of long-term gain. This approach has the merit of not putting in the same boat the investor who buys and resells shares within the same year and the owner of a plex who keeps his building for 40 years to make it his own. pension fund.

But whatever the formula, there are big money to be recovered for the tax authorities, since the partial exemption from capital gains deprives Ottawa of 22 billion per year and Quebec of 2.4 billion.

No, there’s nothing cheerful about thinking about tax increases, but pandemic debt and social programs won’t pay for themselves. Especially with rising interest rates.

The important thing is to find the least harmful tax measure for the economy. As Colbert, the great financier of the Sun King, said, the art of imposition consists of plucking the goose to obtain the most feathers with the least amount of shouting.

1. Consult the report of the Parliamentary Budget Officer

2. Read “Rethinking capital gains taxation”

3. Consult Luc Godbout’s thoughts on taxation