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Joe Oliver: Brace yourself for brutal tax hikes — and not just for the rich

If the Liberals were to win a hastily called election this fall, look for a rise in income tax on the middle class or increase to the GST

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By Joe Oliver

Brace yourself! Massive financial support and unconstrained spending to counter an economic shutdown will lead to painful tax hikes.

In terms of policy and politics, taxes come in two kinds: those that may be popular but generate precious little funds and hurt the economy and those that can generate substantial revenue but are sure vote-losers. Let’s take a wild guess that the government will prioritize its own political survival because of both a profound sense of entitlement and an equally deep belief that its Conservative opposition is not only unqualified to lead the country but is fundamentally evil. Since the end justifies the means in a Manichean battle, the prime minister may implement both types of tax increase — but with careful attention to the sequence.

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Pollster Nick Nanos has pointed out that the Liberals are in a sweet spot for an election this fall. They could cynically capitalize on the hundreds of billions of taxpayers’ dollars they have bestowed on individuals and businesses in dire circumstances. For months the prime minister has monopolized the spotlight and, in an assault on parliamentary democracy that would have brought the media to the barricades had he been a Conservative, limited questions and terminated debate. His rationale for an unseemly rush to the polls will be that he needs a mandate to confront the new economic challenges.

If he goes any later than the fall, fear of the pandemic will subside (barring a resurgence) and public focus will turn to our staggering $1-trillion debt and the need it creates to raise taxes or cut spending. Critical eyes will also examine the hastily concocted spending programs, some of which do not bear even superficial scrutiny. And the Conservatives will have a new leader with time to communicate his vision. The Liberal lead in the polls could quickly vanish and the opposition parties force an election at their own, not the government’s, convenience.

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Less likely is a wealth tax because it would be too painful for too many uber-rich friends of the currently governing party

So if it is autumn, what will the government do? Opt for the first type of taxes — popular but inefficient — and either introduce a death tax or raise the inclusion rate for capital gains or maybe even both. It will argue, wrongly, that each tax would raise substantial funds and make the system more fair by soaking the rich. Less likely is a wealth tax because it would be too painful for too many uber-rich friends of the currently governing party.

An estate tax changes how people plan their futures. It reduces savings, investment, employment and economic growth and destroys family businesses and farms. It would also hit productivity and competitiveness. In Canada, it would exacerbate capital flight and potentially drive away some of our most productive entrepreneurs.

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Canadians already pay high taxes, with a marginal rate of over 53.5 per cent in Ontario, plus sales, property, fuel and other indirect taxes. Confiscating a portion of what is left would incense those who have made sacrifices to provide for their families. Even so, a generous exemption could exclude enough people to make its divisive politics of jealousy politically profitable for the Liberals.

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For its part, increasing the inclusion rate for capital gains would discourage savings and capital formation, reduce economic growth, unfairly tax gains from inflation and impose double taxation. Furthermore, since the tax is only triggered when assets are sold, a higher rate would increase the “lock-in effect” that distorts capital allocation and creates economic inefficiency.

Tax hikes change behaviour, which is why they rarely produce the revenues their backers promise. For example, in 2014 the Heritage Foundation estimated that death tax receipts would account for only 0.5 per cent of U.S. federal revenue between 2015 and 2024.

If the prime minister were to win a hastily called election, he will finally have to confront financial reality. Either that or the credit agencies will do it for him. Both because higher corporate tax rates would stymie recovery and because this government seems constitutionally incapable of prudent spending it will be forced to either raise income tax on the middle class or increase the GST.

One percentage point in the GST generates about $8 billion a year, so an increase from five to eight per cent would bring in roughly $24 billion a year. The public would be outraged since, during the election campaign, the Liberals would have piously denied any and all plans for a massive tax hit. But the people might forgive them four years later when Prime Minister Justin Trudeau had fled to a dream sinecure at the UN and Mark Carney could claim his record of rescuing countries from a financial turmoil merited a “new” Liberal government.

Depressing? Only if you care about your standard of living.

Joe Oliver was minister of finance in 2014-15.

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