Wealth tax would make Canada’s bad situation even worse

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Appeared in the Financial Post, October 7, 2021
Wealth tax would make Canada’s bad situation even worse

The Liberal minority government will likely partner on most legislation with the NDP. Given that both parties want to spend significantly more money, there’s a real possibility that the government will create new wealth tax in addition to potentially higher capital gains taxes. Both policies would markedly damage an already reeling investment climate.

The NDP specifically campaigned on the introduction of a new wealth tax and a higher capital gains tax. The Liberals have mused about increasing the capital gains tax and Finance Minister Chrystia Freeland has supported the idea of a wealth tax.

It’s important to understand the context in which these tax increases are being considered. Simply put, business investment in Canada is dismal. A recent study published by the Fraser Institute compared the rates of growth in business investment (excluding residential construction) for the four years preceding recent recessions. Liberal Prime Minister Jean Chrétien recorded the highest average growth rate of 9.2 per cent. Tory Prime Minister Brian Mulroney had the second-highest average rate of growth of 8.0 per cent. Prime Minister Trudeau, on the other hand, was the only leader to record a decline in business investment—0.9 per cent per year (on average) between 2016 and 2019.

Another recent study published by the Fraser Institute compared business investment in Canada with other industrial countries. It concluded that Canada performed relatively well in attracting investment between 2000 and 2010 but since then has markedly underperformed compared to the United States and most industrial countries included in the analysis. Indeed, between 2015 and 2019, Canada’s growth in business investment was lower than in virtually any other period since 1970.

Which brings us back to the wealth tax. Advocates misleadingly argue that many countries have imposed such taxes and that they can easily and simply be introduced without much cost. A recent paper published by the Fraser Institute by Philip Cross, former chief analyst at Statistics Canada, found that many countries that experimented with wealth taxes eventually abandoned them as they were expensive to administer, raised little revenue, and imposed noticeable economic costs on the economy. Specifically, wealth taxes discouraged the very capital investment essential to raising living standards and prosperity.

Moreover, wealth is practically difficult to define, and thus even more difficult to tax without imposing enormous economic costs on Canadians. For example, will homes be included in the definition of wealth? If so, will they adjust for the level of debt linked with a home? If the answer to both is yes, there’s a clear incentive for wealthy Canadians to load up on mortgage debt to avoid a wealth tax.

More worrying, though, is how such a tax would treat non-tradeable assets such as equity in private companies. A wealth tax on such equity could chase the very investment Canada needs desperately out of the country. Indeed, one of Canada’s most successful entrepreneurs just warned about this very effect. Jim Pattison in a recent interview explained how a wealth tax would likely create an “exodus” of investment out of Canada.

Similarly, those advocating for capital gains tax increases tend to ignore the competitive and economic implications of a higher tax. A 2021 study published by the Fraser Institute of 36 industrialized countries concluded that Canada’s existing capital gains tax rate ranked between 16th and 19th highest depending on the province (capital gains are taxed both federal and provincially). If the tax rate were increased as the NDP propose, Canada would have between the 5th and 7th highest capital gains tax rate.

Given the importance of business investment to workers and the economy more broadly, these types of taxes are some of the worst ways for governments to raise revenue. And they certainly shouldn’t be introduced at a time when Canada already suffers from marked declines in business investment. Canada must become more attractive and competitive for business investment and entrepreneurs. Introducing a wealth tax and/or raising the capital gains tax would make a difficult situation worse.