Tax system still favours the rich

Amid the uproar against tax increases in last week’s federal budget, an important fact is getting lost: the changes will do little to diminish the enormous special privilege the tax system provides for those with capital.

When it comes to the tax world, there are basically two types of people — those who have capital and those who work for a living.

The tax system is much tougher on working people, who make up the vast majority of Canadians, including almost everyone in the lower and middle class. Working people pay taxes on their full working incomes, with few exemptions, and their taxes are deducted before they even receive their paycheques.

Then there are those who own capital — stocks, bonds and other property.

The tax system is riddled with special privileges for these capital holders, starting with the fact they can hold their capital for years as it rises in value without paying tax on it — an enormous benefit. Also, the dividend income it produces and the eventual capital gain it generates upon sale are taxed at special low rates.

The budget will only slightly reduce the privileges of capital holders over working people.

The most effective way to tax the wealthy would be a wealth tax — which was recommended by the Parliamentary finance committee in its prebudget report in February. A wealth tax could be applied exclusively to those with, say, net wealth above $10 million, excluding everyone else.

But increasing capital gains taxes is the next best thing, particularly when the increase is targeted at the very privileged group — roughly 0.13 per cent of Canadians — with annual capital gains above $250,000.

The budget will make them pay a little more; instead of including just 50 per cent of their capital gains in their taxable income, they’ll be obliged to include 66 per cent of gains (above $250,000).

This doesn’t mean, as Premier Doug Ford erroneously suggested, that they’ll pay a 66 per cent tax rate.

Assuming they’re in the top tax bracket where the rate is 53 per cent, they’ll pay a greatly reduced rate of just 35 per cent (on gains above $250,000), and they’ll continue to pay just 26 per cent on gains below $250,000.

Even so, there’s been outrage. The Ontario Medical Association bizarrely insists the increase “could force existing physicians out of practice.”

The changes will affect doctors who hold their investments in private corporations (which they set up for tax avoidance purposes). While they’ll be taxed on more of their capital gains, they’ll still derive significant tax benefits from being able to incorporate — benefits not available to wage earners. No reason to stop practising medicine.

Another group potentially affected are those owning second homes, often as investments to provide them with pension income.

Even with the budget, the profit on a second home would have to exceed $500,000 for a married couple (who both qualify for the $250,000 exemption), before they’d be bumped into the higher inclusion rate for their capital gain — which would still be taxed at a preferential rate.

By comparison, wage earners who don’t own a second home (or often not even a first one) receive no preferential tax rate on their pension income.

From time immemorial, the rich and their acolytes have devised ingenious arguments to justify special tax treatment for capital, invariably by suggesting that, without it, they won’t invest and we’ll all suffer.

But there’s little evidence to support this. From 1988 to 2000, Canada had a higher inclusion rate for capital gains — 75 per cent — and it didn’t discourage investment. In fact, investment soared; the Canadian stock market rose by 300 per cent.

After studying the question exhaustively in the 1960s, Canada’s Royal Commission on Taxation, headed by Bay Street accountant Kenneth Carter, decided there was no justification for taxing capital gains more favourably than working income, concluding: “A buck is a buck is a buck.”

The budget’s tax changes are a small but important step in that direction.