Many critics have voiced concerns about the potential impact of a capital-gains tax increase on Canada’s investment and productivity
Prime Minister Justin Trudeau , Finance Minister Chrystia Freeland and cabinet ministers hold the 2024 federal budget before tabling it on Parliament Hill in Ottawa, on April 16.Kevin Milligan is professor in the University of British Columbia ’s Vancouver School of Economics. He regularly advises the federal cabinet, including on capital-gains tax policy.
If tweaking tax rates is the only policy idea we have to improve our position after a generation of low productivity, I fear we’ll waste a generation of time – just as this country has done before in seeing productivity decline over the years. Companies can move their after-tax profits into the pockets of shareholders by paying dividends, all of which are further taxed. Or companies can buy back shares, which raises the price of outstanding shares. Under the old system, when shareholders sold stock and generated capital gains, only half of those gains were taxed. The government proposes to increase that inclusion rate to two-thirds.
One question to critics concerned about the potential impact on the economy: Would the reverse, lower capital-gains tax rates, actually result in productivity gains? I’m skeptical. First, we need more corporate investment to make our people and economy more productive. We know what works is to have tax incentives close to the investment decision. We should extend and expand the soon-to-expire accelerated depreciation measures that lower taxes on firms only when they invest.
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