Reining in speculation in the housing market
This morning federal finance minister Flaherty announcedÂ a number of measures ostensibly aimed at reining in speculation in the housing market.Â
His announcement was typically well-timed to coincide with the Vanier Institute’s annual report on the state of Canadian family finances, which reports record high levels of household debt, growing inequality and housing prices increasingly out of whack with incomes.
But the measures Flaherty announced seem little more than symbolic as they are all related to CMHC NHA insured mortgages.Â I don’t imagine many serious speculators make use of CMHC insurance.
There’s a better way to rein in housing and asset price speculation: close the tax loopholes that benefit short-term speculation and provide more funding for affordable housing.
Unfortunately all the media discussionÂ about policy to control or prevent a housing bubble and asset speculation has focused on regulation or on monetary policy, and little or nothing on what the Finance minister should focus on: fiscal policy.
It seems clear to me that the tax loophole for capital gains and stock options that allows half of all capital gains to go tax free has played a major role in encouraging speculation and asset price increases.Â Â I’ve always assumed that the lower rate of taxation for capital gains was originally brought in to compensate for general price inflation, but that rationale was abandonned when Paul Martin cut the capital gains inclusion rate from 75% down to 50% in 2000 while inflation wasÂ very low.Â Â Â
This trickle-down supply-side inspired tax cut was supposed to spur investment and hence productivity, but in thatÂ it appears to have been a dismal failure.Â Â Canada’s productivity since 2000 has been pretty much stagnant.Â
This treatment of capital gains also penalizes longer-term investments because it makes no adjustment for general price inflation: the inclusion rate is 50% whether the asset was purchased in 1975 or last month.Â A much better approach would be to tax capital gains at the full rate after adjusting for inflation since the asset was purchased.Â Â
These tax breaks (the partial capital gains inclusion rate for personal and corporateÂ income and the stock option deduction, leaving alone non-taxation of principal residences) have cost the federal government an average of almost $10 billion a year in the five years from 2004-2008 according to the Finance Department’s latest tax expenditure report.Â
The benefits of the capital gainsÂ tax break have also overwhelmingly gone to those with the highest incomes.Â As the CRA income tax stats for 2007 show, 86% of capital gains deductions went to the 5.4% of all taxfilers who reported income of over $100,000 in 2007. (some, no doubt because they declared capital gains in that year).
The fact that investors and CEOs with stock options pay tax at half the rate of ordinary working employment income remains highly offensive to any sense of tax fairness.Â What is less appreciated is how preferential treatment of capital has resulted in an increasingly unstable economic system.
Its a good thing many Canadians do not fully grasp all the techno tax speak that is built into tax returns- otherwise precisely many of the items you mentioned that stare working people in the face when they fill out their taxes would produce a whole lot more red in those frustrated cheeks that is usually seen at tax time.
On another potentially unrelated- but actually considering we are talking taxes- maybe related matter! I wonder how it is that in Greece all the world’s media today was jabbing barbs into the need for austerity within future budgetary intricacies which could mean increased taxes but also more cuts to public spending. I am so glad these people finally translated that frustration with a general strike.
How is it that working people are supposed to be blamed and now penalized from the fallout of a financial meltdown- the irony is just amazing. And the business media paints it so so so one sided it is pathetic.
I hope this will not be the last we hear from Greece and it’s workers- apparently Spain is up next.
I do wonder will we finally start seeing some more advanced and more organized sites of resistance to this whole collapse?
I think the measure are directed as amateur speculators who buy a house for themselves that they can’t afford in the long term with the expectation of selling it for a profit in a few years. They are probably more numerous and dangerous then serious speculators.
I suspect the minor rule changes are going to be poorly understood and the general public is now going to rush to get into a mortgage before the rules change in April. Thus boosting prices going into the spring.
Hear no bubble, see no bubble, speak no bubble.
This is great work Toby. The tax expenditures are really a third budget (along with spending and taxes paid), and they escape close parliamentary scrutiny. The Carter commission approach – a buck is a buck – should be the starting point for tax reform, and the capital gains tax (with an inflation adjustment as you suggest) would be a good place to start. Equalizing taxes paid on salary and “capital” income would face serious opposition, so bring on the debate.
Please point to the HUGE tinkering that has changed anything!
They are asking Banks to enforce the speed limit.
Nothing else has changed.
Investors need to buy with more than 30% down to create break even or positive cash flows so is 20% any different as a guideline?