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New capital gains hike won’t work as claimed but will harm the economy

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4 minute read

From the Fraser Institute

By Alex Whalen and Jake Fuss

Capital taxes are among the most economically-damaging forms of taxation precisely because they reduce the incentive to innovate and invest.

Amid a federal budget riddled with red ink and tax hikes, the Trudeau government has increased capital gains taxes. The move will be disastrous for Canada’s growth prospects and its already-lagging investment climate, and to make matters worse, research suggests it won’t work as planned.

Currently, individuals and businesses who sell a capital asset in Canada incur capital gains taxes at a 50 per cent inclusion rate, which means that 50 per cent of the gain in the asset’s value is subject to taxation at the individual or business’ marginal tax rate. The Trudeau government is raising this inclusion rate to 66.6 per cent for all businesses, trusts and individuals with capital gains over $250,000.

The problems with hiking capital gains taxes are numerous.

First, capital gains are taxed on a “realization” basis, which means the investor does not incur capital gains taxes until the asset is sold. According to empirical evidence, this creates a “lock-in” effect where investors have an incentive to keep their capital invested in a particular asset when they might otherwise sell.

For example, investors may delay selling capital assets because they anticipate a change in government and a reversal back to the previous inclusion rate. This means the Trudeau government is likely overestimating the potential revenue gains from its capital gains tax hike, given that individual investors will adjust the timing of their asset sales in response to the tax hike.

Second, the lock-in effect creates a drag on economic growth as it incentivises investors to hold off selling their assets when they otherwise might, preventing capital from being deployed to its most productive use and therefore reducing growth.

And Canada’s growth prospects and investment climate have both been in decline. Canada currently faces the lowest growth prospects among all OECD countries in terms of GDP per person. Further, between 2014 and 2021, business investment (adjusted for inflation) in Canada declined by $43.7 billion. Hiking taxes on capital will make both pressing issues worse.

Contrary to the government’s framing—that this move only affects the wealthy—lagging business investment and slow growth affect all Canadians through lower incomes and living standards. Capital taxes are among the most economically-damaging forms of taxation precisely because they reduce the incentive to innovate and invest. And while taxes on capital do raise revenue, the economic costs exceed the amount of tax collected.

Previous governments in Canada understood these facts. In the 2000 federal budget, then-finance minister Paul Martin said a “key factor contributing to the difficulty of raising capital by new start-ups is the fact that individuals who sell existing investments and reinvest in others must pay tax on any realized capital gains,” an explicit acknowledgement of the lock-in effect and costs of capital gains taxes. Further, that Liberal government reduced the capital gains inclusion rate, acknowledging the importance of a strong investment climate.

At a time when Canada badly needs to improve the incentives to invest, the Trudeau government’s 2024 budget has introduced a damaging tax hike. In delivering the budget, Finance Minister Chrystia Freeland said “Canada, a growing country, needs to make investments in our country and in Canadians right now.” Individuals and businesses across the country likely agree on the importance of investment. Hiking capital gains taxes will achieve the exact opposite effect.

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EU Tightens Social Media Censorship Screw With Upcoming Mandatory “Disinformation” Rules

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From Reclaim The Net

By

This refers not only to spreading “fact-checking” across the EU member-countries but also to making VLOPs finance these groups. This, is despite the fact many of the most prominent “fact-checkers” have been consistently accused of fostering censorship instead of checking content for accuracy in an unbiased manner.

What started out as the EU’s “voluntary code of practice” concerning “disinformation” – affecting tech/social media companies – is now set to turn into a mandatory code of conduct for the most influential and widely-used ones.

The news was revealed by the Irish media regulator, specifically an official of its digital services, Paul Gordon, who spoke to journalists in Brussels. The EU Commission has yet to confirm that January will be the date when the current code will be “formalized” in this way.

The legislation that would enable the “transition” is the controversial Digital Services Act (DSA), which critics often refer to as the “EU online censorship law,” the enforcement of which started in February of this year.

The “voluntary” code is at this time signed by 44 tech companies, and should it become mandatory in January 2025, it will apply to those the EU defines as Very Large Online Platforms (VLOPs) (with at least 45 million monthly active users in the 27-nation bloc).

Currently, the number of such platforms is said to be 25.

In its present form, the DSA’s provisions obligate online platforms to carry out “disinformation”-related risk assessments and reveal what measures they are taking to mitigate any risks revealed by these assessments.

But when the code switches from “voluntary” to mandatory, these obligations will also include other requirements: demonetizing the dissemination of “disinformation”; platforms, civil society groups, and fact-checkers “effectively cooperating” during elections, once again to address “disinformation” – and, “empowering” fact-checkers.

This refers not only to spreading “fact-checking” across the EU member-countries but also to making VLOPs finance these groups. This, is despite the fact many of the most prominent “fact-checkers” have been consistently accused of fostering censorship instead of checking content for accuracy in an unbiased manner.

The code was first introduced (in its “voluntary” form) in 2022, with Google, Meta, and TikTok among the prominent signatories – while these rules originate from a “strengthened” EU Code of Practice on Disinformation based on the Commission’s Guidance issued in May 2021.

“It is for the signatories to decide which commitments they sign up to and it is their responsibility to ensure the effectiveness of their commitments’ implementation,” the EU said at the time – that would have been the “voluntary” element, while the Commission said the time it had not “endorsed” the code.

It appears the EC is now about to “endorse” the code, and then some – there are active preparations to make it mandatory.

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Alberta

Lesson for Ottawa—don’t bite the hand that feeds you

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From the Fraser Institute

By Tegan Hill

The Alberta government has launched a campaign to inform Canadians about the negative impacts of the federal government’s cap on greenhouse gas (GHG) emissions in the oil and gas sector, which exempts the other three-quarters of the economy that emit including transportation, buildings and heavy industry.

According to Alberta Premier Danielle Smith, the cap will “kill jobs” and lead to “economic and societal decline” for all Canadians—and she’s right. Any policy that damages Alberta’s economy comes with consequences for all of Canada.

Of course, this isn’t the first Trudeau policy to damage the sector. The list includes Bill C-69 (which imposes complex, uncertain and onerous review requirements on major energy projects), Bill C-48, (which bans large oil tankers off British Columbia’s northern coast and limits access to Asian markets), “clean fuel standard” regulations, numerous “net-zero” targets, and so on.

Again, while these policies disproportionately impact Albertans, they have consequences for all Canadians from coast to coast because of Alberta’s role in the federation. In our current system, Ottawa collects various taxes from Canadians across the country and then redistributes the money for programs including equalization and employment insurance.

For perspective, from 2007 to 2022 (the latest period of available data), Albertans contributed $244.6 billion more in taxes and other payments to the federal government than they received in federal spending—more than five times as much as British Columbians or Ontarians. The remaining seven provinces received more federal spending than they contributed to federal revenues. In other words, Albertans are by far the largest net contributor to Ottawa’s coffers.

Albertans’ large net contribution reflects the province’s comparatively young population (fewer retirees), higher rates of employment, higher average incomes and relatively strong economy.

Alberta’s relative economic strength isn’t new. From 1981 to 2022, the province had the highest annual average economic growth rate in Canada. In 2022, Alberta accounted for 17.9 per cent of Canada’s total economic growth despite being home to just 11.6 per cent of the country’s population. That same year, Alberta contributed nearly one in every five private-sector jobs created in Canada. In fact, Alberta was one of only two provinces (alongside Nova Scotia) where private-sector employment growth (including self-employment) exceeded government-sector employment growth over the last five years (2019 to 2023).

Alberta’s prosperity, which helps finance other provinces, may help explain why 56,245 more Canadian residents moved to Alberta than left it in 2022—a much higher net inflow than in any other province. For decades, Alberta has provided economic opportunities for Canadians from other provinces willing to relocate.

Albertans continue to contribute more to the federation than Canadians in other provinces due to Alberta’s relatively strong and prosperous economy. And Canadians benefit from the economic opportunities Alberta provides. With this in mind, the Trudeau government should stop imposing economically damaging policies on the province—as it costs not just Albertans but all Canadians.

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