More taxes on capital gains would be misguided

By Andrew Rickard | March 11 2016 10:24AM

The Fraser Institute is warning the federal government against raising taxes on capital gains in the upcoming budget.

In an article posted to The Fraser Institute’s web site on March 8, authors Charles Lammam and Ben Eisen note that there has been some speculation that the federal government may increase the tax rate on capital gains in the March 22 budget. They go on to give three reasons why they believe this would be a bad idea.

Lock-in effect

First of all, they argue that capital gains taxes are harmful because they discourage both individuals and businesses from selling old assets and reinvesting the proceeds in new, more productive ones because the sale would trigger taxes. This is what economists refer to as the “lock-in effect”, and the authors argue it leads to lower levels of entrepreneurship, economic growth, and job-creation.

Lammam and Eisen go on to warn that higher capital gains taxes would reduce the financing available for entrepreneurs “Financiers take on enormous risk when they invest in unproven ventures. And entrepreneurs help drive innovation by taking risks, often accepting lower wages for a period in hopes of future benefits,” they write. “Capital gains taxes reduce those potential benefits, and reduce the attractiveness of entrepreneurship and economic risk-taking.”

Too many tax hikes

Finally, the article says that an increase in the capital gains rate would be the third tax hike in several months. Not only has the federal government added a new income tax bracket and increased the top tax rate from 29% to 33% on Jan. 1, 2016, but it also reduced the maximum TFSA contribution amount from $10,000 to $5,500.

“Given the harmful effects of capital gains taxes, these changes impose unnecessary economic challenges,” concludes the article. “One of the most important ways the government could use tax policy to promote innovation and entrepreneurship is by enacting capital gains tax relief.”