As we enter the seventh month dealing with this damned pandemic, governments around the world have unleashed unprecedented spending in order to prop up companies, provide wage subsidies for laid off or furloughed workers, or just straight-up handing over cash to its citizens. This has been, to put it mildly, HUGELY expensive. The US government is projecting a deficit of about $3.8 TRILLION dollars, and that’s just this year. In Canada, our deficit is projected to hit $343 billion, with COVID-related subsidy programs costing about $212 billion dollars. To put that in comparison, Canada’s budget for its entire military for 2019 was only $45 billion.
Which of course begs the question: Canada has a military?
For the last time, people, YES. Canada has a military. It’s just mostly composed of moose, and as you can see from that budget, those moose eat a LOT.
But the second question that springs to mind is: How the Hell are we going to pay for all this stimulus money later?
I mean, somebody’s going to have to pay for all this spending eventually, so the question is: Who and how much will it cost them?
Now, I don’t have any special knowledge about what the government’s planning on doing, so we can only speculate, but here are my best guesses.
Taxing Dividends More
Raising taxes on dividends might at first seem like a politically palatable move, since it’s only those rich fat-cats with million-dollar stock portfolios who would even notice, right? Except the favourable dividend tax rates in both US and Canada were never meant as a tax break for the wealthy, they were designed to avoid double-taxation.
Dividends are paid to investors after corporate taxes are already paid, so if the dividend tax rates were increased, it would amount to a form of double-taxation which is inherently unfair. That doesn’t mean the government won’t do it, but I’m betting that they’ll leave dividend taxes alone, considering there are far easier ways to soak rich people, like…
Taxing Capital Gains More
Increasing tax rates on capital gains would also be another way for governments to target rich people. In the US, capital gains held for more than a year can be realized at 0% (if you do it gradually), and in Canada, 50% of realized capital gains get added onto your income. So increasing either of these tax rates could totally be in the realm of possibility.
My issue with this idea is this: What capital gains?
Honestly, with stock markets in turmoil are that many people sitting on huge windfalls in their investment accounts right now? And even if they were, no matter what the capital gains tax rate is, because you choose when to realize capital gains, it’s always possible to delay capital gains indefinitely while you’re still working, and then strategically realize capital gains so that any taxes you’d owe would be offset by your personal exemption amount in retirement.
So they can try messing around with the capital gains rate, but I don’t think that will yield them enough money.
Taxing Capital Gains on Housing More
For Americans reading this, they might be thinking “What are you talking about? Capital gains on houses are already taxed.”
They might be surprised to learn that in Canada, capital gains on your primary residency are tax-free. Yup. That’s one of the reasons our housing market has been so crazy lately.
Removing the tax-free status of primary residences in Canada would affect a huge swath of the population, but I also think it’s fair, especially if paired with an increase in taxes on financial assets. Why should your house be exempt from taxation when every other source of income isn’t?
Of course, the CRA could exempt a portion of your capital gains and make it tax-free like the Americans do. Currently, the IRS allows the first $500k of capital gains to be exempt for a married couple, so if we did something like that up here it would only affect people whose house has appreciated by more than that, and with so much of Canadian’s wealth tied up in their house, this would likely generate enough tax revenue to pay for all this stimulus.
Creating a Wealth Tax
Oh, the far-left would love it if they could do this, wouldn’t they? Here’s the problem with wealth taxes. They don’t work.
That’s not me speculating. That’s based on the experience of Europe in the 90’s. Back then, twelve European countries tried to implement some kind of wealth tax and they kept discovering the same thing over and over again. If you try to tax wealth, the wealth just leaves.
Unlike the middle-class which holds most of their wealth in their home, the truly wealthy (defined as having a net worth greater than $10M USD) keep most of their wealth in financial assets. Stocks, bonds, trust funds, whatever. And unlike real estate, those things can move.
If your government knocks on your door and decides to tax the heck out of your house, well you don’t really have a lot of options. You have to pay it because you can’t move your house. But when all your wealth is in paper (or nowadays, electronic) assets, you’re just one plane ticket (or in the Europe’s case, a train ticket) away from relocating both yourself and your wealth to another country with friendlier tax laws.
Wealthy people, by the way, also tend to be the job creators, so this has a double-whammy effect of negatively impacting your job market. Wealth taxes, to put it simply, are hard to enforce and easy to avoid.
Which is why France abolished its wealth tax in 2017 in an effort to attract talent and money back into the country. French economists estimated the outward flow of wealth cost the French government twice as much revenue as the total ultimately yielded by the tax.
So while governments can try to implement a wealth tax, it’s not going to work and it certainly won’t be enough to offset their deficit.
I’ve heard the argument that taxing consumption, in the form of a national sales tax (or in Canada’s case, a sales tax increase) is an inherently more beneficial tax because it discourages spending and rewards saving. I’ve also heard the argument that it benefits rich people more since it’s a flat tax that applies to everyone regardless of their income.
What I KNOW is that it’s insanely unpopular. When Canada implemented a national sales tax, that government lost power for over a decade. Something about seeing 15% added onto every bill irked people for some reason.
And I’d also argue that given that a lot of people are hurting right now, is deliberately raising the cost of living for everyone a good idea? Especially since it would hurt people without jobs the most.
So while this might work in terms of having the scale necessary to foot this stimulus bill, it would be deeply unpopular and probably turf whatever government is in power.
Raising income taxes
So finally we come to income taxes. It’s the only tax increase on this list that would simultaneously be large enough to pay for this debt, and be able to reliably generate that tax revenue.
How that increase would look is of course up for debate. Targeting only the highest tax brackets would be more politically palatable, but that would need to be balanced with the fact that there are far fewer taxpayers in the top tax bracket. Would that be enough to offset this debt, or would the middle tax brackets also need to be increased?
I do know that there’s only so much you can tax extreme high earners before it stops having an effect. In Ontario, the effective top tax bracket is above 50%, and when you start going too far above 50%, the doctors, lawyers, and business owners who are paying that tax rate simply work less. What’s the point, they argue, if most of my earnings are going towards the government?
So for that reason, I do think that an income tax increase that affects at least part of the middle-class is going to happen.
What Do You Think The Government Should Do?
So that’s my take. While I fully expect governments to try to go after the so-called fat-cats, meaning rich multi-millionaires, when this pandemic is finally over, history has shown that it just doesn’t work. There are just too many ways to avoid those types of taxes for that approach to work at the scale governments need.
Taxing consumption would just be cruel to people who are still unemployed. So that leaves us with either taxing houses, or a middle-class income tax hike.
What do you all think? What do you think is the most fair way to pay for this unprecedented spending it’s taking to fight the pandemic, and what do you think will actually happen? Let’s hear it in the comments!
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