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November 27, 2020 | Hang On

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Three more sleeps till Chrystia rocks your world. On Monday the shiny new finance minister will give an update. Not a budget (like all the adult countries have received during the pandemic). Just a back-of-the-envelope kinda thing to keep tab of Justin’s spending (another $532 million on Friday for indigenous folks).

Remember the last deficit number? Right, $342 billion. The most ever by a margin of almost three hundred billion. (By the way, one billion is 1,000 times a million.) This blog asked its sketchy readers for estimates on what the latest shortfall would be, since there have been many, many spending announcements of late.

Over 300 of you responded. The reader who comes closest to the announced number on Monday will be granted a guest post here – and the freedom to embarrass yourself on the topic of your choosing. It will be an epic moment.

Meanwhile RBC is guesstimating the deficit will be $370 billion for the year. In 2021, even with the pandemic ending, the bank says Canada will almost double the worst-ever Conservative shortfall, with the Liberal red ink amounting to another $90 billion as more spending programs (child care, pharmacare, green infrastructure) click in. All this will push the accumulated national debt well over $1 trillion, becoming the momma of all problems down the road when interest rates snake higher. Yes, Millennials have no idea what lies ahead…

So, how do we afford this?

In the short term, the Bank of Canada prints the money, sends it to Trudeau and he spends it. This is backed by the issuance of government debt (bonds) which investors, mostly institutional, buy. The debt is considered ‘risk-free’ by financial markets, paying peanuts – currently just under half a per cent annually on five-year money. Over time this will change as the economy rebounds, inflation returns and investors demand more.

So the feds also need to raise more revenues to help cover spending. Promises made in the September Throne Speech alone (like looking after your kids and paying for your prescriptions) will cost between $19 billion and $44 billion a year. Extra. Forever. This stuff can’t happen without more taxes, since the bond-flogging thing will get extreme.

Warns the scary CD Howe Institute: “Taxpayers and policymakers should not underestimate the scale of tax increases needed if Ottawa increases spending as much as envisioned in the Speech from the Throne.” Its conclusion was that the only way to Hoover more billions from citizens without hurting the economy too much is through the GST. Yes, back up to 7%. So when added to the provincial sales tax, that means HST of 15% in Ontario and 17% in the Maritimes.

Meh. This would raise about $15 billion, not even enough to cover the latest Trudeau promises, let alone any Covid stuff (vaccinating everyone will cost $2 billion). So it’s likely there’ll be more changes coming in the Spring budget (not Monday’s update). A candidate for that is a higher capital gains inclusion rate.

Yeah, again. The anxiety over this ebbs and flows, but it looks increasingly like Mr. Socks will go postal on ‘the wealthy’ now that the virus has emboldened him to give silly speeches about a ‘great reset’ and a re-engineering of society. (Sheesh, we just want our shot…)

My pal, tax expert Jamie Golombek, points out that 90% of Canadians never report a capital gain. And of those who do, three-quarters of the total was declared by just 10% of that group, with incomes over a hundred grand. In fact 55% of all the taxable capital gains in Canada were reported by people earning in excess of $250,000. That’s only 160,000 folks – and they’re already in the 50%+ top tax bracket.

So, yup, this change would affect a relatively small number who already pay a disproportional amount, but it would affect them strongly. So it’s a good thing the tax system has little to do with fairness, and much more with punishment.

How would it work? Well, raising the inclusion rate to 75% (the direction we’re headed in) would mean three-quarters of a gain added to taxable income for a year, then subject to the marginal rate. Since the most affected people are in the 52% bracket, the capital gains tax goes up 50%.

So what, the masses cry? Should we shed tears for the 1%ers?

Nope. But higher taxes on the money people make from risking their capital means they may risk it less. That hurts expanding companies, new start-ups, financial markets, commercial real estate and ultimately pension funds, while it encourages investors to hang on to gains instead of selling assets and triggering tax. The move would also make it wise for people to focus on keeping assets inside RRSPs and especially TFSAs, where gains remain tax-free.

Well, whatever happens, something will happen. Current spending is unsustainable. Yet the prime minister wants to spend more. Since over 40% of voters pay no net tax with the burden heaped atop the shoulders of a few, you can smell what’s coming. Chrystia wrote a landmark book on rich people, “and the fall of everyone else.” In her world, there would be no powerful wealthy folks. Just powerful political ones. And she plans on succeeding Trudeau.

Gulp.

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November 27th, 2020

Posted In: The Greater Fool

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