Following the election of the Liberal government, several financial sector experts and economists have turned their attention to the Trudeau team’s promise to raise the corporate income tax rate for banks and insurance companies from 15% to 18%, all while creating a “Recovery Dividend” paid by these same companies, for a total bill of $2.5 billion a year, for four years.
But while attacking these financial giants can pay off politically, the fact is that these measures will instead have the effect of penalizing Canadian families and savers.
Governing based on electoral motives rarely generates the hoped-for economic results, especially when we’re talking about raising tax rates for a key sector of our economy that determines in part the retirement incomes of millions of Canadians.
Indeed, while the image of a banker with a glass of scotch in one hand and a Cuban cigar in the other, sitting atop his tower in downtown Toronto, may capture the popular imagination, it is worth our while to ponder just where these financial institutions’ profits end up.
In Canada, the performance of many public pension plans depends in part on the increase in value of the shares of Canadian banks and insurance companies. For example, the Canada Pension Plan holds substantial amounts of assets in the financial sector year after year. Thus, when the profits of these financial institutions are artificially reduced by a tax increase, it is all savers who suffer.
In other words, millions of Canadians are indirectly shareholders of our banks and share in their profits. That’s quite far removed from our imaginary stereotype of a rich banker, isn’t it?
Moreover, although there are few charter banks in Canada due to the current regulatory framework, the financial sector remains highly competitive. Just think, for instance, of the frequent promotions offered by financial institutions, or of the permanent reduction in various fees, as we are seeing at the moment with the elimination of brokerage fees by certain banks.
But it’s clear that the sector will not be able to remain as competitive if new fiscal and regulatory obstacles are thrown in its path. And it is consumers who will end up paying the price, through the potential increase in certain fees.
The Trudeau government justifies these new tax proposals notably by invoking the increased spending during the pandemic, and the desire to augment federal government revenues. However, before thinking about increasing the tax burden borne by Canadian companies and individuals, policy-makers should instead look for ways to control public spending.
In barely five years, the federal debt has doubled in size, with the country recording deficits even in periods of economic growth before the pandemic. The solution must come from the spending side, not the revenue side.
After all, even if we add up all the new measures for increasing revenues presented in the federal budget, combined with the maximum revenues that could be collected thanks to a one-time wealth tax, it would take the federal government just a little less than sixteen days to spend these new revenues.
Populist political measures like raising taxes on banks and insurance companies usually only generate very superficial revenues for government, but they entail substantial costs for consumers and savers.
Our governments have to stop giving in to political and popular pressures, and focus instead on the economic analysis of their public policies and their consequences for Canadian families, all while controlling spending in order to avoid shortchanging future generations.
Miguel Ouellette is Director of Operations and Economist at the MEI. The views reflected in this opinion piece are his own.