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.