It’s amazing how many people want to pretend that small changes make no difference at the margins. Except, of course, when they want to highlight (or warn of) how effective making small changes at the margins can be.
Since last week’s federal budget, there has been much discussion about proposed changes to how Canada taxes capital gains. It’s complicated stuff, and it’s clear to me after a series of conversations with the public that capital-gains taxes are not particularly well understood.
So, God help me, here goes: Capital-gains taxes are a tax levied against the increase in value of an asset after it is sold. The asset can be a piece of property, a business, shares — anything that can be purchased and then grows in value. (Primary residences, despite some speculation and discussion in recent years, remain completely exempt from capital-gains taxes, though I’m honestly wondering how long that’ll be the case.) The budget does not propose to raise your tax rate on capital gains, per se. What it proposes to do is increase the amount of the capital gain that is subject to your normal tax rate, for amounts above $250,000. Previously (and still technically) the first 50 per cent of a capital gain was not taxed. The next 50 per cent was taxed at your normal rate. The budget proposes to change the exempted amount — the so-called inclusion rate. You would still get a third of the capital gain tax-free. The remaining two-thirds would be taxed at the normal rate.
I know this is a lot of math, and the actual real-world implications will vary depending on the specific circumstances of any transaction, but that’s basically the gist of it. Just under 17 per cent of a capital gain that was exempt from tax will now be taxed at your marginal rate. Depending on the size of the capital gain, this could be a marginal increase or a huge one. It obviously depends on how much money we’re talking about.
I want to give the feds this measure of sincere credit: the government has definitely tried to structure this in a way that does not unduly penalize fairly normal economic activity. It has raised the lifetime exemption for all capital-gains taxes, and, as noted, the new rules kick in only after $250,000 in capital gains each year.
So I think it’s fair to grant that the Liberals’ intention was clear. I doubt they actually expect to realize much revenue gain from this, but it certainly gives them an opportunity to talk a lot about generational fairness and wealth inequality and to generally be seen to be soaking those rich bastards that no one really likes, right? It is, put simply, political. And no kidding.
The problem that they seem to be running into is that they may be capturing some people with this that they did not intend to. One of the groups that will be affected isn’t particularly sympathetic. It’s people who own secondary residences. I don’t expect there to be much of a grassroots popular uprising to defend tax exemptions for cottage owners. But I do think there is a political danger for the Liberals here. Baby boomers are aging, and as they pass away, families will be inheriting secondary residences, including perhaps the homes they grew up in. Owing a bit more tax on mom and dad’s old place or lake house might not sit well with some voters. And, frankly, even when it comes to the icky cottage owners, given how much of remaining Liberal political support is concentrated among fairly affluent baby boomers, this might not be landing exactly the way the feds intended or hoped.
But the real issue where opposition seems to be growing is around doctors and other allied medical professionals. Over the past week or so I have spoken with chiropractors, dentists, and veterinarians, all of whom typically operate their practices as incorporated businesses that they own. They sometimes also own the facilities they operate out of and sell those upon retirement, preferably to someone who is taking over their practice. That’s their retirement.
There has been speculation since the budget that these tax changes will produce something of an exodus of health-care professionals out of the country. We should note, in good faith, that much of the speculation has come from those who are politically opposed to the budget and to the government itself. But not all of it. There seems to be some genuine, sincere concern. I want to address it.
For the record, I doubt that there will be much of a stampede out of the country. It takes a lot to get someone to pick up everything and move. I am skeptical that the proposed tax changes in isolation would lead to a stampede to the border.
But this isn’t landing in isolation. We all know those working in the health-care system are operating under enormous emotional and financial strain. So a tax tweak might not be a silver bullet, but do I think it will have an effect at the margins? Of course it will. There are going to be some medical professionals who consider this the last straw. I’d be shocked if it were a lot, but I’d also be shocked if it were zero. Some will leave. Some will retire. Some will never set up here at all.
In a damned interesting interview on the CBC this week, federal small-business minister Rechie Valdez made an awfully quotable comment, probably one far more interesting than she had hoped or intended. Under questioning from David Cochrane, the minister seemed to acknowledge or at least not to deny that the proposed tax changes will drive some medical professionals out of practice in the country. But not to worry, she said. We’re recruiting more from abroad to make up for that!
Oh. I see.
The minister’s answer offers us two immediate items to ponder. First, she was acknowledging that there is indeed going to be some problem with health-care-worker retainment due to the tax changes, which is something the government had thus far not wanted to admit. For instance, asked a similar question on Wednesday, Chrystia Freeland rattled on for a while about fairness, then pivoted to the awesomeness of dental care.
Well, okay. Duly noted, Ministers Freeland and Valdez.
Second, we all ought to mull over the obvious and unavoidable problem with Valdez’s answer: a tax-policy change that is enough to drive existing doctors out of practice in this country will clearly disincentivize foreign-trained or newly graduated doctors from ever setting shop here in the first place. If it’s a big enough deal to change the incentives for our existing professionals, it will necessarily change the incentives for the ones we hope will be our future professionals. This may be beyond the grasp of Minister Valdez, but not, I suspect, my readers — or my doctor.
So good work, guys.
Like I said, I don’t expect there will be huge swings in employment due to this. But even if the numbers are relatively small, we have to ask ourselves, given the widely acknowledged state of our health-care system and its massive staffing shortages, whether any would be too much.
I don’t know what the answer to that should be, for what it’s worth. It’s up to the federal government to decide whether or not these possible small changes constitute an acceptable trade-off in service of the tax changes or if this is something that it hadn’t fully considered and may require amendments. I’ll leave that up to the Liberals. And then it’s up to voters to decide what they think of the government’s decision. But what I will note is that we should at least be able to have conversations about small differences existing at the margins, which isn’t something we struggle to do in other contexts.
What’s the point of a carbon tax? It’s a small nudge to gradually shift the economic incentive away from fossil fuels toward cleaner options. Why do we resist introducing even nominal user fees for access to government services, especially health care? Because even small fees would absolutely result in some people choosing to forgo these services. Why do road tolls work? Because people will go to surprising lengths to avoid even small fees if they can.
None of the above is controversial. It’s accepted to the point it’s banal.
Changing the inclusion rate for the capital-gains tax is a price signal. It’s a price signal that will directly affect vital professionals that are already in short supply. It will make it harder to go abroad to find replacements.
It might be worth it, anyway, in pursuit of a broader goal. But that is the conversation we need to be having. Instead, we’re mostly getting evasions and bromides about the wealthiest needing to do a “little bit more” to be “fair” and, wow, isn’t dental care going to be amazing? And also, screw the cottagers, right?
None of this is a serious response to a serious issue. I wish I were surprised.
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