Pity the Poor Capital Gains-Makers
I am glad that Jim Flaherty’s budget did not actually come through with a rumoured exemption for capital gains income.Â Recall that the Conservatives’ 2006 platform had promised a ridiculous and unworkable exemption from income taxes on capital gains so long as the winnings were “re-invested.”Â This high-profile broken promise still clearly niggled the Harper government, and expectations were high that the budget would contain some other form of loophole for the coupon-clippers of the land.
Instead, we got something almost as bad: personal tax-free savings accounts, in which ALL forms of investment income (not just capital gains) will be tax sheletered, on up to $5000 of capital per year for every adult Canadian.Â Someone in their late 50s, therefore, will be allowed to avoid tax on all investment income on $200,000 of capital.Â This measure, applauded on Bay Street (more subsidies for brokers, even as Mr. Flaherty claims to be not “picking winners”), is insidious and dangerous.Â Investment income in general is very unequally distributed (very few Canadians have any significant financial wealth outside of registered pension plans and RRSPs), so this goodie is aimed clearly at the top.
My only regret is this: based on the rumours, I had prepared a zinger of a Globe and Mail column berating the idea of a capital gains exemption — that I had to pull at 4 pm, when we realized there was no such exemption!
Nevertheless, the facts and figures about the incredible concentration of capital gains income at the very top of the income ladder are worth repeating — column or no column!Â
44 percent of capital gains savings are claimed by the richest 0.5% of taxpayers — those with incomes over $250,000.Â Two-thirds are claimed by thoseÂ making over $100,000.Â Â In its pre-budget submission, the Investment Funds Institute of Canada claimed speciously that “55 percent of those reporting capital gains income have incomes under $50,000 per year” (quoted in the Globe and Mail, sometime in February!)Â Yes, but how MUCH did those salt-of-the-earth coupon-clippers claim?Â Not much (see stats below).Â IFIC’s claim is reminiscent of the other old Bay Street red herring: the one about how 50% of Canadians own (directly or indirectly) at least one share in a major bank, so why on earth would anyone ever complain about sky-high bank profits?
Here are excerpts from the column on capital gains that (happily) did not see the light of day.Â Thanks to Toby Sanger for highlighting the escalating tax expenditure cost of the existing 50% loophole for capital gains.
A capital gain is the income you get by successfully following the old investorâ€™s adage, â€œbuy low, sell high.â€Â You donâ€™t actually have to do anything useful or productive.Â You just have to resell an asset (stock, bond, rental property, collectible hockey card, whatever) for more than you bought it. Â In other words, you speculate.
Speculators already enjoy incredible favouritism from the taxman.Â Capital gains are only taxed when they are realized (that is, when the asset is sold).Â And even then, investors only declare half of their winnings.Â The other half is tax-free.Â A grease-covered cook flipping burgers at McDonaldâ€™s must report every penny of hard-earned cash on their tax return. Â But the coupon-clippers of the land only declare half.Â Go figger.
In 2005 Finance Canada pegged the cost of the current 50 percent loophole for individuals at $2.3 billion per year.Â But due to clever tax avoidance (and the booming stock market), that has suddenly doubled, to over $5 billion per year.Â If a government social program did that, critics would claim
And the efforts of financiers to custom-design increasingly complex vehicles to take advantage of this tax favouritism lead to all sorts of economic mayhem.Â Securitized mortgages, asset-backed commercial paper, and other now-discredited derivatives were all spurred, in part, by this lucrative government subsidy to speculators.
It costs Ottawa another $5 billion per year to give corporate tax-filers the same loophole.Â So in total,
Whatâ€™s more, the benefits of this loophole are amazingly concentrated at the top of the income ladder.Â In fact, there is no other single measure which more effectively delivers value to the super-rich of the land, than the favourable treatment of capital gains.
According to 2005 tax returns (most recent data available), there were 134,000 Canadians whose total income exceeded $250,000 that year â€“ one half of one percent of all tax-filers.Â Yet that tiny, privileged slice of society claimed 44 percent of all capital gains.Â Those rich Canadians were allowed, legally, to hide $7.3 billion in capital gains (or about $55,000 each).Â Over two-thirds of capital gains were declared by those with total income over $100,000.
In contrast, the 22 million Canadians with total income below $100,000 were allowed to hide capital gains averaging $24.79 per person.
Of course, financiers justify this imbalance with pious claims about the productivity of their investments, the need to foster frugality, and all sorts of other mumbo jumbo.Â If you believe that, I have some sub-prime mortgage bonds Iâ€™d love to sell you.Â