Montreal, November 2, 2017 – While Ottawa has set aside its plans to increase the inclusion rate of the capital gains tax—from 50% to 75% according to rumours—an Economic Note published today by the MEI shows that this kind of tax is particularly harmful. The government should instead reduce or abolish it, as a number of countries have done.
“Capital formation is one of the foundations of economic growth. Yet investment in Canada has fallen 18% since 2014. Now that the oil industry boom is behind us, it’s obvious that Canada has a chronic problem. The capital gains tax reduces the availability of capital, and makes it more expensive for companies. Who ends up paying the price? Workers in particular, through fewer jobs and lower wages,” explains Mathieu Bédard, Economist at the MEI and author of the publication.
The capital gains tax also hurts innovation by reducing the appetite of investors for riskier start-ups.
On the other hand, the abolition of our capital gains tax could encourage productivity growth in Canada, which would in turn improve the living standards of all Canadians. One study shows that each dollar of reduction of capital gains taxes would lead to economic gains of approximately $1.30. It is the tax whose elimination would bring the most gains.
“Several other countries have followed this path; why not us?” asks Mathieu Bédard. “New Zealand, Switzerland, and Hong Kong do not tax capital gains at all. In these places, positive effects from the absence of capital gains taxation have been documented.”
Moreover, the capital gains tax cannot be justified by the meagre revenues it generates for the government. The reductions in federal government tax revenues from its abolition would be $4.3 billion, or just 1.5% of its total revenues.
While the reduction or the abolition of capital gains taxation would involve complex tax issues, these technical and legal issues can be solved through ongoing vigilance and targeted legislation when necessary, the publication points out.
“Common sense favours a reduction in this kind of tax, even its elimination. This tax does not generate a lot of revenue for the government, yet it is a major burden for our economy. Several countries have found ways to deal with these issues, and there is no reason to believe that Canada could not do so as well in order to improve the standard of living of all Canadians,” concludes Michel Kelly-Gagnon, President and CEO of the MEI.
The Economic Note entitled “The Capital Gains Tax: It Should Be Reduced, Not Increased” was prepared by Mathieu Bédard, Economist at the MEI. This publication is available on our website.
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The Montreal Economic Institute is an independent, non-partisan, not-for-profit research and educational organization. Through its studies and its conferences, the MEI stimulates debate on public policies in Quebec and across Canada by proposing wealth-creating reforms based on market mechanisms.
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