Despite a recent report by the International Monetary Fund suggesting Canada will lead in economic growth next year, the general consensus remains skeptical, particularly regarding productivity. The federal government’s reluctance to cut spending, coupled with rising interest costs on national debt, necessitates new tax revenue sources.
Government Spending and Taxation
Prime Minister Justin Trudeau and Finance Minister Chrystia Freeland have been engaging with think-tanks advocating for a home equity tax to address housing affordability for youth. This proposal has sparked controversy, particularly among seniors who may be asset-rich but cash-poor. Over the past nine years, the Liberal government has introduced numerous taxes to fund its spending, including:
- A four per cent tax increase on the wealthy in 2016
- The revised “tax on split income” regime in 2018 targeting small-business owners
- The Underused Housing Tax
- A luxury tax on certain automobiles, aircraft, and boats
- Adjustments to the Alternative Minimum Tax affecting charitable donations
- An increase in the capital gains inclusion rate to two-thirds from 50 per cent
These measures, while showy, are not substantial revenue generators and lack sound taxation policies. Without significant spending cuts, Canadians should brace for more superficial tax measures.
Bold New Thinking
Canada needs innovative taxation policies to reverse its economic decline and boost productivity. One promising idea is the “distributed profits tax” approach used by Estonia. In Estonia, corporations pay zero corporate tax until profits are distributed to shareholders, encouraging investment and entrepreneurial startups. However, tax policy expert Jack Mintz suggests no deferral on passive income and capital gains, advocating for immediate taxation to prevent personal income tax avoidance.
Estonia’s system has yielded impressive results, with 17.8 business startups per 1,000 people in 2023 compared to Canada’s 4.9. Estonians also start 45 times more information, communication, and technology businesses per capita than Canadians.
It’s time for Canada to consider bold ideas like the distributed profits tax and other innovative solutions to stimulate economic growth and productivity. As the ancient Roman poet Horace said, “Begin, be bold and venture to be wise.”
