The lower the better

Our political leaders ignore the one change that could reignite the economy: cutting or eliminating the capital gains tax.

For many years the economic profession has backed that simple message and stated that the lower the tax, the better for our economy.

People and businesses would respond. Economists generally are united in arguing for no tax on capital gains.

This is obvious from sensible models. A tax on anything, even investing, curbs demand for that.

There are large costs associated with taxes on capital gains. Capital or savings invested in new production, increases future growth and consumption. A tax on capital gains obviously discourages investment and that goes on and on.

Hence, a zero tax on capital gains would be beneficial, also for individuals who do not have any such income, as the overall economy would improve. A tax on individuals’ income would be the better alternative.

All but forgotten is the fact that in the 1950s and 1960s Canada routinely ranked second (only to Japan) as the fastest growing major economy.

At that time there was no capital gains tax in Canada.

People who object nowadays, stating that it is unfair, forget that when businesses pay out their gains later in the form of dividends or salary, they are taxed.

Yet, at the present time we are being taxed twice, once when earned, and then again when distributed.

This stands in sharp contrast to the concession for RRSP accounts. Hence, if a business owner faces a choice, he could perhaps take $10,000 beyond immediate needs of the company, and place it in an RRSP account.

There it would attract no tax forthwith, or otherwise reinvest the money in  a new factory, and face a corporate income tax now and a capital gains tax when the factory is sold.

In other words, the choice is between reinvesting the money in the company or putting the funds in the RRSP account in someone else’s already existing business.

Certainly, at the present time we are punishing the entrepreneur (and the national economy) and rewarding the person who lives on dividends or investments from others.

As a counter-argument it is suggested that for social stability we should tax the wealthy and that rising inequality, assuming incorrectly that a cut in capital gains taxes fosters that, there is a destabilizing effect that would lead governments to take measures against the wealthy segments of the population.

However, if the overall economy flourishes because of capital gains tax cuts that reasoning is invalid.

A cut in capital gains taxes would not be very costly as it would stimulate growth. Also, our capital gains tax of 25 per cent is much above the U.S. rate of 15 per cent.

It should be apparent that the case for cutting the capital gains tax is clear.


Bruce Whitestone