Wealth tax would make Canada’s bad situation even worse

The Liberal minority government will likely partner on most legislation with the NDP. Given that both parties want to spend significantly more money, there’s a real possibility the government will both impose a new wealth tax and raise capital gains tax rates. Both policies would markedly damage an already reeling investment climate.

The NDP campaigned on the introduction of a new wealth tax and a higher capital gains tax. The Liberals have mused about increasing the capital gains tax and in her writing as a journalist Finance Minister Chrystia Freeland has supported the idea of a wealth tax.

It’s important to understand the context in which these tax increases are being considered. Simply put, business investment in Canada is dismal. A recent Fraser Institute study co-authored by one of us (Clemens) compared the rates of growth in business investment, excluding residential construction, for the four years preceding recent recessions. Liberal Prime Minister Jean Chrétien recorded the highest average growth rate of 9.2 per cent. Tory Prime Minister Brian Mulroney had the second-highest average rate of growth of 8 per cent. Prime Minister Trudeau, on the other hand, was the only leader to record a decline in business investment — 0.9 per cent per year (on average) between 2016 and 2019.

Another recent study published by the Fraser Institute compared business investment in Canada and other industrial countries. It concluded that Canada performed relatively well in attracting investment between 2000 and 2010 but since then has markedly underperformed compared to the United States and most industrial countries included in the analysis. Indeed, between 2015 and 2019, Canada’s growth in business investment was lower than in virtually any other period since 1970.

Which brings us back to the wealth tax. Advocates misleadingly argue that many countries have imposed such taxes and that they can be introduced easily and simply and at little cost. A recent Fraser Institute paper published by Philip Cross, a regular contributor to this page and former chief analyst at Statistics Canada, found that many countries that experimented with wealth taxes eventually abandoned them as they were expensive to administer, raised little revenue, and imposed noticeable economic costs by discouraging the capital investment that is essential to raising living standards and prosperity.

Wealth is difficult to define in practice, and thus even more difficult to tax without imposing enormous economic costs on Canadians. For example, will homes be included in taxable wealth? If so, will there be an adjustment for the level of debt linked with a home? If the answer to both is yes, there’s a clear incentive for wealthy Canadians to load up on mortgage debt to avoid paying wealth tax.

What is more worrying, though, is how such a tax would treat non-tradable assets such as equity in private companies. A wealth tax on such equity could drive away the investment Canada so desperately needs. In a recent interview, Jim Pattison, one of Canada’s most successful entrepreneurs, warned that a wealth tax would likely create an “exodus” of investment from Canada.

Those advocating for capital gains tax increases also tend to ignore the competitive and economic implications of a higher tax. A 2021 Fraser Institute study of 36 industrialized countries concluded that Canada’s existing capital gains tax rate ranked between 16th and 19th highest, depending on the province (capital gains are taxed both federal and provincially). If the capital gains tax rate were increased to the level the NDP proposes, Canada would have between the fifth and seventh highest rate among these 36 countries.

Given the importance of business investment to workers and to the economy more broadly, wealth and capital gains taxes are among the worst ways for governments to raise revenue. They certainly shouldn’t be introduced at a time when Canada already is suffering from marked declines in business investment. Canada needs to become more attractive and competitive for business investment and entrepreneurs, not less. Introducing a wealth tax and/or raising the capital gains tax would make a difficult situation worse.