Eliminate the Capital Gains Tax on Domestic Investments

The capital gains tax is a problematic tax. It operates to reduce the average return on investment on market-traded investment assets. This, in turn, weakens the incentive for people to devote their resources to investment in the future, and makes it more likely that they will consume them in the present instead. This is a problem for Canada, because investment in Canadian businesses operates to raise the wages of Canadian workers and to improve the productivity of the Canadian economy. The less investment in our country, the less of these good things we get.

For this reason, I would suggest the total elimination of the capital gains tax on domestic business investments by Canadians, while retaining it for foreign investments. Any investment (stock or bond purchase) in a business or subsidiary that has Canadian residents for at least 50% of its workforce would be free of the capital gains tax. This would be a powerful incentive for Canadian investors to make investments that directly benefit Canadian workers and the Canadian economy. At the same time, if a foreign investment provided a far more lucrative opportunity, the Canadian investor would still be able to invest in it; something which straight capital controls, a more heavy-handed method of encouraging domestic investment, wouldn’t allow.   

Leftists are bound to oppose this proposal on the grounds that it would cut into government revenue in order to provide a benefit to the rich; the people who need to be benefitted the least. This would be a very superficial way of looking at it though. When an investor makes an investment in a Canadian business, they are benefitting Canadian society at large just as surely as if they were contributing to the government’s budget by paying taxes. Actually, that is putting the case too mildly: business investments are much more likely to benefit Canadian society than contributions to the government budget are. This is because investors are induced, by a series of powerful monetary incentives, to invest in those businesses and processes that are the most promising in terms of advancing the productivity of the Canadian economy and Canadian workers (which in turn leads to higher demand for Canadian labor and lower prices for Canadian consumer goods). Governments, on the other hand, are only guided by political incentives, which are just as likely (if not more likely), to lead to the money being squandered on giveaways to anti-social special interest groups, as they are to lead to the money being spent on things which actually benefit the Canadian economy and Canadian society.  

Really then, the investor in Canadian business is already making a powerful contribution to Canadian society. Is it really a good idea to demand that they contribute even more to society at large via taxation, especially if it means deterring the activities that lead to such benefits? I would say, most emphatically, that it is not.

Unfortunately, most people are too ignorant of basic economics to appreciate the benefits of investment in their country, and thus will stick to a superficial analysis of my proposal and dismiss it as an unjustifiable ‘giveaway’ to the rich. They are of course entitled to hold their ignorant opinions: but they should not be surprised when their foolishness leads to the economic stagnation of our country.