Process
Status Items Output None Questions None Claims None Highlights Done See section below
Document Notes
Looking at some arguments the rich make about why they shouldn’t be taxed on their capital gains… and why it’s bullshit.
Highlights
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Canada’s Liberal government announced a modest change that would try to rebalance the scales a bit, raising the country’s capital gains inclusion rate from 50 percent to 67 percent. Predictably, the rich went nuts and warned it would tear the country apart.
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Capital gains are profits that are made by selling something — an asset of some kind, which could be a financial asset or property or fine art — for more than what was originally paid. In the tax system, this kind of income is called a capital gain, and it has always enjoyed preferential tax treatment. In Canada, only a portion of a capital gain needs to be reported as income for tax purposes, which is determined by the inclusion rate.
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from the perspective of the conventional economics and tax world — people who accept all of these arguments about free-flowing capital and how efficient markets are and how business entrepreneurship is the leading force in society — you get all kinds of mumbo jumbo arguments about why we must treat income from investments more favorably than income from any other source, including working for a living. So you’ll get all kinds of stories about how it’s an incentive to invest, or it’s an incentive to take risks. You often hear this sort of thing — as if taking risks is somehow something we want people to do more of. I mean, I taught my children not to take risks. I taught them to look both ways before they cross the street. This mythology that taking risks in and of itself is a productive activity is unbelievable.
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Another argument is that since investors have already paid tax on the money they initially invested, they shouldn’t have to pay tax on the profits from those investments, which is also ridiculous. While some may have paid tax on their initial investment, that’s not the case if they inherited it or if it was a reinvested capital gain from another investment, which is often what happens. Regardless, whether you paid already or not, the profit from that investment is new income, so you should pay tax on it just like everybody else does.
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Another common stereotype is that favorable treatment of capital gains is necessary if we’re going to have business investment in machinery and equipment and technology and research and development — wrapping the whole thing up in a high-tech cloak. And that’s not true either. Our report looked at the history of Canada’s actual investments in machinery and equipment and technology and research, and there’s no correlation at all to capital gains. Capital gains taxes don’t discourage running a business.
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what is the real effect of this incredibly favorable treatment? It widens inequality. Investment income already flows disproportionately to the top end of society, and this incredibly sweet tax arrangement reinforces that concentration.
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Because they pay a higher marginal tax in the first place, typically over 50 percent when combining federal and provincial taxes, reducing their taxable capital gains saves them 50 cents on every dollar excluded. In contrast, someone at the lower income threshold might save only 15 cents on each dollar of excluded capital gains. So the rich not only receive most of the capital gains but also enjoy a bigger rate of effective tax subsidy for each dollar of those capital gains. This double-barreled effect exacerbates income inequality, as our report shows that the concentration of capital gains at the top end significantly widens income inequality ratios and, on an after-tax basis, it’s even worse due to that double-barreled effect.
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The capital gains system costs the federal government over $30 billion a year in foregone revenue.
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By reallocating just a tenth of that amount into targeted direct subsidies for different research activities in any industry — whether it’s clean energy or generic pharmaceuticals or any other high-tech sectors — we could achieve much greater results than through the existing tax incentives, most of which have no connection whatsoever to the investments being made