Correcting Common Misunderstandings about Capital Gains Taxes

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  • This essay reviews some of the common misunderstandings related to capital gains and their taxation.
  • First, a significant body of research concludes that taxes on capital are among the most economically damaging. Two of the more important adverse effects from higher taxes on capital gains are that they raise the cost of capital and discourage entrepreneurship.
  • Second, of the 36 industrialized countries included in the analysis, Canada currently ranks between 16th and 19th highest depending on the province for our capital gains tax rate. If the inclusion rate is increased to 75 percent, Canada’s ranking is between 5th and 7th highest, depending on the province, for capital gains tax rates.
  • Third, it is commonly believed that is largely the rich who earn capital gains, but this is a result of the way in which income is measured in most analyses. Specifically, the capital gains themselves are included in the measurement of income, which inflates the income of people claiming capital gains. The share of capital gains taxes paid by those earning more than $150,000 per year (in 2020) falls from 77.4 percent when the capital gain is included in income to 48.0 percent when it is excluded. In other words, those earning less than $150,000 a year pay a much greater portion of capital gains taxes than many believe.
  • Moreover, the share of capital gains taxes increases from 12.8 percent for those earning less than $100,000 when the capital gain is included in income to 38.4 percent when it is excluded.
  • The analysis of who actually pays capital gains taxes, research on the consequences of higher capital gains taxes, and Canada’s current lack of competitive advantage all point to the same conclusion: capital gains taxes should not be raised.

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