A tiny slice of the Canadian population was touched by the recent capital gains change. Far more must be done to tax the rich.
by Claire Trottier. Originally published on Policy Options
May 27, 2024
(Version française disponible ici)
The richest are not paying their fair share in taxes, which means that the government is missing out on revenue it could use to benefit the lives of the majority of Canadians.
Home prices are out of control, our health-care system is underfunded, and investments are needed to meet our climate goals. Unless this longstanding discrepancy is addressed, wealth will continue to be accumulated in the hands of the very few while regular people struggle, leaving the government without adequate resources to fund crucial programs.
In its 2024 federal budget, the Trudeau government proposed steps that would help equalize the tax rates between the richest Canadians who primarily make their money from passive income, and working people who earn a paycheque. These proposed changes to how capital gains are taxed would only require the richest 0.13 per cent of Canadians to pay more, alongside help to address exploding housing costs.
Despite the narrow scope of this change, it (predictably) generated outrage among some of my wealthy peers alongside those who seem ready to go to battle to ensure that the very rich continue paying less tax than working people as a per cent of taxes on income.
Full disclosure: I am a beneficiary of the preferential rate on capital gains. So, what do I have to complain about?
My life story is an illustration of the absurd contrast in how we treat capital gains and income from a paycheque. And, I am here to tell you I believe that money generated from capital should be taxed at the same rate as money earned from labour.
It’s important to understand that the inherent unfairness of this system is the result of wealth inequality. Earning your money primarily from capital gains instead of a paycheque requires you to have access to capital in the first place.
It’s not an option available to most people, and yet while working people are taxed on their full paycheque, only 50 per cent of capital gains are currently taxed. I may pay a higher dollar amount compared with some working people, but I pay a much lower rate, even compared to high earning doctors, lawyers and engineers.
Why should I pay a lower rate just because I was lucky enough to have money to invest, and why should someone who actually works for a living have to pay a higher one?
When I worked as a professor in microbiology and immunology, I earned my income from a salary, just like other working Canadians. Every dollar I earned working an actual job was considered taxable. I left that job in 2021, and since then I’ve been living partly on capital gains, which are earned in personal and family assets I help manage and from which I benefit.
On top of everything else, I would not be in a position to receive this passive income if I didn’t already have access to capital, which for some reason our tax code values more than working for a living.
As you move up the wealth and income scale, you come across fewer and fewer people who are making most, or sometimes any, of their money from a paycheque. Instead, the rich invest in the stock market, property and other ways to keep their wealth growing. As such, they have enjoyed lower tax rates for decades.
Passive income earners strike back
Since the modest measures announced in the budget, I’ve heard plenty of absurd arguments from people who have been enjoying the benefits of this unjustifiable tax break, and who are now attempting to rally the masses in support of continuing to pay a lower tax rate than working people.
One claim is that this change will harm working- and middle-class Canadians.
Let’s unpack this logically. First of all, 28.5 million Canadians don’t earn any capital gains at all. Second, only 0.13 per cent of Canadians make $250,000 or more, the threshold established by this change to begin paying a larger share.
In fact, the only individuals subject to the new tax are those who bring in on average $1.4 million a year. Add in exemptions for primary residences, and a $1.25 million exemption on small business shares, farm property, and fishing property, and we are ultimately discussing a tax change that would only impact Canadians who are significantly better off economically than the vast majority of Canadians.
Another absurd argument being put forward suggests the ultra rich represent the majority of productivity in Canada.
Productivity comes in many forms, including grocery clerks struggling to afford exploding food prices, construction workers building homes they can’t afford to buy, and consumers who actually fuel economic growth but are watching larger chunks of their budget getting eaten up by housing costs that have more than doubled since 2011.
Moreover, entrepreneurs who are often engaged in economically productive activity like job creation actually saw their exemptions limit raised in this proposal.
We saw a recent example of how shareholder and investor wellbeing has little to do with productivity activity.
Meta recently announced the layoff of 11,000 people. This resulted in a 20 per cent increase in their stock price, and a dividend issued to shareholders. I own stock in Meta. If I sell that stock and realize capital gains, I will have directly benefited from an already profitable company that has just negatively impacted the lives of thousands of people.
At the very least, I should be paying the same per cent of tax on those gains as former employees would have paid on their salaries.
Equity benefits everyone
Those fighting back against this increase in capital gains tax don’t want to admit one simple truth: the unequal treatment of capital gains and earned income has been jet fuel for inequality in Canada.
The change introduced in the 2024 budget is a first step in addressing that longstanding injustice but is narrowly tailored to impact only those who have benefitted the most from it.
The wealthy are the greatest beneficiaries of the things our taxes pay for: a stable economy with a strong consumer base, a workforce educated in high quality schools, infrastructure that ensures their workers and customers can move safely and efficiently, a public healthcare system that keeps the workforce health and doesn’t require employers to carry the financial burden of insurance like their U.S. counterparts, and housing policy that ensures people can keep a roof over their head with something left in their pocket to spend on goods and services.
The least they should be asked for in return is to pay the same tax rate on their income as millions of working Canadians.
I and my wealthy peers should be proud to contribute more, not only because it’s the right thing to do, but also because it helps to build a stronger and more stable economy that benefits everyone.
In a time when ideological encampment has weakened our social cohesion, we should be able to rally around supporting the society we all want to live in, instead of a stratified Canada where the very wealthy enjoy ease and luxury while everyone else struggles to get by.
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This article first appeared on Policy Options and is republished here under a Creative Commons license.