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Clarke Wood's avatar

This is completely on point. Some years ago I was at a contractors gathering with a premier. The first questions from the floor were about scrapping the carbon tax and lowering business taxes. The next set of questions were about when the government was going to fund more projects to employ said contractors.

Anyone doing a large direct investment nowadays spends considerable time lobbying the various levels of government and you end up with deals where each job costs the public exorbitant sums. It would be vastly cheaper for the government to do it themselves, which really messes up a lot of theories.

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Mark Tilley's avatar

Governments subsiding investors?! Say it ain’t so!

UK, US, and Canadian governments have almost always subsidized investors, not just corporations, via lower rates (or no tax at all) for capital gains compared to labour or business income.

In the UK, there was no capital gains tax until 1965. Since then there have been a hodgepodge of lower rates and exemptions.

In the US capital gains actually were taxed like ordinary income at the time income tax was introduced in 1913, but have been taxed at lower rates with various additional exemptions since 1921.

Income tax was introduced in Canada in 1917, but there was no tax on capital gains (following the UK philosophy of protecting aristocratic wealth) until 1972 after being recommended by the Royal Commission on Taxation (aka the Carter Commission) in 1966. That Commission recommended full inclusion though - no 50% exclusion and no inflation adjustment. (It felt that getting the benefit of increasing value while deferring the tax until sale offset the the cost of paying tax on inflation - an argument I don’t happen to agree with. There is no real benefit without realization, but inflation is real, and ensuring there is no benefit prior to sale can be managed by deeming a realization if an asset’s inflated value is used as security.)

The Carter Commission also recommended that principal residences be fully taxed in the same way, but with a lifetime $25K exemption.

It should also be noted that the Carter Commission did not intend that capital gains be considered a replacement for the previous estate tax (inheritance recipients would be taxed instead).

As we all know, that’s not what happened.

Capital gains would be 50% exempt, principal residences would continue to be fully exempt, there would be no inheritance tax and there would henceforth be no estate tax either. Accrued estate gains up to that point that would have eventually been captured as inheritance tax were essentially swept aside, resulting in a windfall to wealthy taxpayers of about $12B ($88B in 2023 dollars) according to U of T economist John Bossons.

Investors may claim that their gains should be protected by beneficial tax rates because, after all, “they’re driving the economy by putting their money at risk!” But that’s a disingenuous argument for an honest capitalist.

It’s the market’s job, not government’s, to reward investment risk through ROI. A lower after-tax ROI would do what? Just drive down asset values to compensate!

The Bank of Canada has been criticized of late for propping up asset value with low interest rates. The real interesting question is not so much why does the BoC feel the need to underwrite asset values, but why have Finance Ministers been doing it for over 50 years?

And who exactly have been benefiting from inflated asset values?

The question is left as an exercise for the reader.

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