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THE RICH WANT YOU TO FEAR TAX FAIRNESS  
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Interview with Jim Stanford by David Moscrop
August 31, 2024
Jacobin
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_ Canada raised its capital gains tax inclusion rate, sparking
outrage from the investing class, who warned of economic disaster. The
data shows that their histrionics were groundless. _

Polls show that most voters across the political spectrum support
higher taxes on the very wealthy. After years of talk, will these
changes now be enacted?, (Image: Yuri Keegstra/Flickr)

 

The wealthy have all sorts of tools at their disposal to protect and
grow their wealth at the expense of the rest of us, including the tax
system. A few months ago, Canada’s Liberal government announced
a modest change
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would try to rebalance the scales a bit, raising the country’s
capital gains inclusion rate from 50 percent to 67 percent.
Predictably, the rich went nuts and warned it would tear the country
apart.

In an interview with David Moscrop, Jim Stanford, economist and
director of the Centre for Future Work, discusses his new report
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which shows how preexisting capital gains policies benefit the wealthy
and exacerbate inequality. He also explains that the fearmongering
surrounding the change was, at best, misguided and suggests further
reforms that would level the playing field even more.

Rich Rage Over Tax Tweak

David Moscrop

What change was made to capital gains taxation in Canada?

Jim Stanford

In its 2024 budget, the federal government announced a change in
what’s called the “inclusion rate” for capital gains. Capital
gains are profits that are made by selling something — an asset of
some kind, which could be a financial asset or property or fine art
— for more than what was originally paid.

In the tax system, this kind of income is called a capital gain, and
it has always enjoyed preferential tax treatment. In Canada, only a
portion of a capital gain needs to be reported as income for tax
purposes, which is determined by the inclusion rate.

For anyone who works for a living, that sounds weird. We must report
all of our wages on our income tax, but if someone profits from
selling assets, they only have to declare a portion of that profit.
The percentage they must declare is the inclusion rate.

For the last twenty years or so, the inclusion rate in Canada has been
50 percent. That means financial traders or property speculators only
have to declare half of their capital gains on their income tax. The
federal government, under Finance Minister Chrystia Freeland, has
reformed that now and raised the inclusion rate to 67 percent. This
means they must declare two-thirds of those capital gains on their
income tax. That’s still a lot less than 100 percent, which is what
most Canadians have to do with their income, whether it comes from
wages or pensions or income support or even self-employment.

But it’s been enough of a change to get the whole financial industry
and conservatives pulling their hair out. And so we’ve had a big,
loud campaign
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this reform coming from those circles.

David Moscrop

Who is earning the capital gains?

Jim Stanford

The two-thirds inclusion rate will apply to corporations who make
capital gains and to some individuals, but not many.

To be subject to this higher inclusion rate, an individual must have
declared over $250,000 in capital gains over one year. The government
has targeted this measure at individuals and corporations, but only
individuals with really big capital gains, meaning only a small share
of the population will be affected.

So who is this group? In our report, I looked at the distribution of
capital gains across different income categories using the Canada
Revenue Agency’s data set on income tax returns. The most recent
data is for 2021. I found that 61 percent of all reported capital
gains that year were claimed by the top 1.5 percent of Canadians. This
is the group that consists of those with over $250,000 in annual
income from any source. Although they represent just 1.5 percent of
all Canadian tax filers, they received 61 percent of all capital
gains.

No other form of income is more concentrated at the top end than
capital gains, even other types of investment income. And any
investment income is going to be flowing disproportionately to people
with wealth. That’s what investment income is. But the particular
nature of capital gains and how they’re taxed — and this
especially sweet loophole — means that the concentration of capital
gains at the very, very top end of our society is incredible.

This is the group that’s going to pay more under the new inclusion
rate. They’re rich and they have loud voices and they have powerful
allies and they have a lot of money. This is why we’re hearing so
much about this measure, which really won’t affect many Canadians at
all.

The Great Tax Swindle

David Moscrop

You point out that wealth is concentrated among those who tend to earn
capital gains. It’s not a surprise that tax law often favors the
wealthy and the powerful. What are the broader implications of
treating capital gains differently than ordinary income?

Jim Stanford

Well, from the perspective of the conventional economics and tax world
— people who accept all of these arguments about free-flowing
capital and how efficient markets are and how business
entrepreneurship is the leading force in society — you get all kinds
of mumbo jumbo arguments about why we must treat income from
investments more favorably than income from any other source,
including working for a living. So you’ll get all kinds of stories
about how it’s an incentive to invest, or it’s an incentive to
take risks. You often hear this sort of thing — as if taking risks
is somehow something we want people to do more of. I mean, I taught my
children not to take risks. I taught them to look both ways before
they cross the street. This mythology that taking risks in and of
itself is a productive activity is unbelievable.

Another argument is that since investors have already paid tax on the
money they initially invested, they shouldn’t have to pay tax on the
profits from those investments, which is also ridiculous. While some
may have paid tax on their initial investment, that’s not the case
if they inherited it or if it was a reinvested capital gain from
another investment, which is often what happens. Regardless, whether
you paid already or not, the profit from that investment is new
income, so you should pay tax on it just like everybody else does.

Another common stereotype is that favorable treatment of capital gains
is necessary if we’re going to have business investment in machinery
and equipment and technology and research and development — wrapping
the whole thing up in a high-tech cloak. And that’s not true either.
Our report looked at the history of Canada’s actual investments in
machinery and equipment and technology and research, and there’s no
correlation at all to capital gains. Capital gains taxes don’t
discourage running a business.

So what is the real effect of this incredibly favorable treatment? It
widens inequality. Investment income already flows disproportionately
to the top end of society, and this incredibly sweet tax arrangement
reinforces that concentration.

The greatest irony is that, due to Canada’s marginal tax rate
system, those at the very top — the richest 1.5 percent, who claim
61 percent of all capital gains — get a bigger kickback from this
preferential tax regime than people at the bottom.

Because they pay a higher marginal tax in the first place, typically
over 50 percent when combining federal and provincial taxes, reducing
their taxable capital gains saves them 50 cents on every dollar
excluded. In contrast, someone at the lower income threshold might
save only 15 cents on each dollar of excluded capital gains.

So the rich not only receive most of the capital gains but also enjoy
a bigger rate of effective tax subsidy for each dollar of those
capital gains. This double-barreled effect exacerbates income
inequality, as our report shows that the concentration of capital
gains at the top end significantly widens income inequality ratios
and, on an after-tax basis, it’s even worse due to that
double-barreled effect.

In Search of an Ideal Tax Rate

David Moscrop

Say we had two goals: to decrease inequality, and to fund social
programs and rebuild the welfare state. What would an ideal inclusion
rate be for capital gains?

Jim Stanford

I believe that a dollar should be treated as a dollar regardless of
where it came from in the tax system. And that was the core finding of
the famous Carter Commission
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in the 1960s, which led to all kinds of tax reforms, including the
introduction of the first-ever capital gains tax in Canada in 1972.

The ideal inclusion rate would be 100 percent, just like every other
form of income that we have. Now this raises some issues about how
corporate dividends or corporate payouts, especially those structed
through trusts, are taxed — where the corporation pays some tax at
first and then the individual pays again. But there are other ways to
solve that problem.

There are also far more effective ways to finance investments in
technology, machinery, equipment, and research and development. The
capital gains system costs the federal government over $30 billion a
year in foregone revenue.

By reallocating just a tenth of that amount into targeted direct
subsidies for different research activities in any industry —
whether it’s clean energy or generic pharmaceuticals or any other
high-tech sectors — we could achieve much greater results than
through the existing tax incentives, most of which have no connection
whatsoever to the investments being made.

_David Moscrop is a writer and political commentator. He hosts the
podcast Open to Debate and is the author of Too Dumb For Democracy?
Why We Make Bad Political Decisions and How We Can Make Better Ones._

* tax the rich
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* wealth inequality
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* Canada
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