With its eye on the next election, the Harper government is getting its ducks in a row. It is making nice with Nova Scotia and trying to get Afghanistan out of play. But damage limitation is not a very compelling terrain for fighting an election.
They would prefer to use the Throne speech to focus our attention on pre-election goodies. And what political strategist doesn’t like tax cuts tailored for that finicky swing voter? A government that has just posted a fat surplus has got to be tempted to spread the love.
But Harper also wants to claim that he has delivered on his promises. New tax cut rhetoric will provoke us to ask what happened to the tax cuts that are still on Harper’s last list of election promises.
The further GST cut is the most famous item on Harper’s “TO DO” list– despite the chorus of tax experts who give it the thumbs-down.
Another tax promise from the 2006 Conservative election platform is still outstanding. They promised to eliminate capital gains tax -- so long as investors reinvest their earnings within six months.
For those of you who are not tax geeks, a capital gain is a very specific form of profit. Let’s say you own an asset -- like stocks or property. If that asset goes up in price, the profit you make when you sell it is a “capital gain”. Capital gains are already taxed quite lightly. You will pay a lot less tax on money made from capital gains than money you earn in your paycheque.
In some ways, cutting capital gains tax appeals to Conservative election strategists. Income trust investors are still seething mad that Harper broke his election promise and reneged on the sweetheart tax treatment of income trusts. The last thing the Conservatives want is to break a further promise to cut a tax paid by investors. Harper needs to make nice with these folks, and capital gains tax is paid by many of the same people who got hit with the income trust reversal.
Unfortunately, Harper’s proposal to cut capital gains tax is such a crazy policy idea that the whiz kids in the Finance Department are probably still trying to figure out how the heck to make it work. How does the government know whether capital gains have really been re-invested within 6 months? Create a big bureaucracy to track what people do with their investments? Keeping tabs on what taxpayers do with their money is a strange idea from a political party that is supposed to be a fan of smaller, less intrusive government.
Moreover, the capital gains tax cut could become another runaway fiscal train. As the proposal was worded in the platform, it looked like it would be simple to avoid paying capital gains tax. This would be a huge revenue suck out of the Federal Treasury.
Let’s say this measure was redesigned, and half of the capital gains that are currently taxed become exempt from taxation this year. This could cost the Treasury more than $800 million in lost personal income tax revenues in 2007 alone. This doesn’t even count the lost revenue from businesses that pay capital gains tax.
This could get plenty awkward for Stephen Harper. Remember -- he had to take action against income trusts because they were hemmoraging so much revenue from federal coffers. How ironic it would be if Harper appeased irate income trust investors by offering a new tax cut that is potentially even more extravagantly expensive.
And who will be the beneficiaries of a cut in the taxation of capital gains? To earn a capital gain, you have to own assets. And guess who owns assets? In terms of the personal income tax system, the folks who report the lion’s share of the capital gains tax are those with incomes over $250,000. So the benefits of this tax cut will flow largely to them.
If you wanted to design a way to channel money to the affluent, you could hardly do better than to cut capital gains tax.
No matter how this capital gains tax cut is redesigned, it is not going to help those who need it the most. And speaking of promises: the Conservatives promised to help “working families”. But tax cuts like this only worsen the growing gap between the rich and the rest of us. Let’s hope the Throne speech doesn’t have any more tax handouts for the well-to-do.
Ellen Russell is a Senior Economist with the Canadian Centre for Policy Alternatives.