Increased taxes on capital gains likely to help the economy

May 29 2024

In addition to making the tax system fairer and providing much-needed funding for health care and other public services, increasing taxes on capital gains could also help the economy. That’s the finding in a recent report from Canadians for Tax Fairness.

Capital gains were taxed at half the rate of earned income

Before the 2024 federal budget, capital gains were taxed at only half the level of earned income. That meant that people who receive much of their income through stock options and dividends — like the owners of the large grocery chains — were able to avoid paying their share in taxes.

Changes in the 2024 federal budget mean that capital gains above $250,000 a year will now be taxed at 66.67%  the level of earned income. It’s far from perfect, but it is a significant step toward making the tax system fairer.

Opponents of tax fairness willing to play fast and loose with facts

While the change to capital gains tax is relatively modest, that hasn’t prevented a number of wealthy individuals from trying to stop the measure from being implemented. Several questionable claims have been made about the impact of the changes to capital gains taxes, including the suggestion that economic productivity will suffer.

No link between level of capital gains taxes and productivity growth

The C4TF report compares capital gains tax rates with labour productivity growth between 1981 and 2023. What the report found was that the highest level of productivity growth during that time was between 1996 and 2000, when the capital gains were taxed at 75%  of the level of earned income. The slowdown in productivity growth “aligned with a key point in Canadian tax unfairness, when numerous tax cuts were instituted with the promise of improving productivity.”  

Increasing capital gains taxes reduces inequality and helps productivity

As the report makes clear, what has been shown to harm economic productivity is income inequality. A major reason for the growth in income inequality and wealth inequality has been tax cuts that disproportionately benefited large corporations and the wealthy — including the cuts to capital gains taxes.

Partially reversing the cuts to capital gains taxes is a step towards reducing income inequality — though more is needed. And, by reducing income inequality, Canada can remove a barrier to economic success.