Lessons from abroad show that taxing capital gains is costly to the economy with little gain to the treasury
Like the late 1990s, the federal government is about to balance its budget after a period of consistent deficits and debt accumulation. While a variety of voices are sure to offer up ways to use the coming surpluses, Canada could encourage investment, entrepreneurship, and ultimately a stronger economy if the federal government replicated the decision by the then-governing Liberals in the late 1990s and reduced capital gains taxes.
Capital gains taxes are applied to the sale of assets when the selling price exceeds the original purchase price. One of the main economic costs of capital gains taxes is that they reduce the efficiency of capital by discouraging the sale of assets for reinvestment in new, more productive assets because the sale of old assets triggers a capital gains tax. Economists call this the “lock-in effect” and it imposes real and significant costs on economies.
Indeed, there is a large and growing body of research showing that low or no capital gains taxes increase the supply and lower the cost of capital for new and growing firms, leading to higher levels of entrepreneurship, economic growth, and job creation. These are all things Canada needs more of.
But despite the wealth of evidence on the benefits of lower capital gains taxes, the federal rate has gone unchanged for nearly 15 years. Today, Canadian governments tax capital gains income at half an individual’s marginal income tax rate. For someone living in Ontario, their top combined federal and provincial capital gains rate is 24.77%.
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