Tax hikes needed to fund post-pandemic vision: CD Howe

The federal government’s latest throne speech signalled plans for major permanent spending increases — an effort that would have to be met with higher taxes, such as raising the GST and capital gains tax, suggests the C.D. Howe Institute.

In a new report, the Toronto-based think tank suggested that with the pandemic still raging, it’s not time to consider permanent spending increases or tax hikes.

But, if the government intends to follow through on the initiatives promised in the latest throne speech — which it estimates could add between $19 billion and $44 billion in annual spending — then the country should expect higher taxes to finance these costs, the group’s Fiscal and Tax Working Group concluded.

The top candidate for raising more revenue, it suggested, should be a GST hike.

The group estimated that restoring the GST to its original level of 7%, while also raising the GST tax credit to offset the impact on lower-income households, would raise around $15 billion in annual revenue.

While consumption taxes are politically unpopular, the group said that they distort economic growth the least and, “considering Canada’s relatively low reliance on them among OECD countries, are an ideal way to raise needed revenues.”

At the same time, the report suggested that a GST hike may be more politically palatable if the capital gains tax rises too, with an increase in the capital gains inclusion rate from 50% to 75%.

“The effective burdens of corporate and personal income taxes on capital gains and dividends have grown apart in recent years. Realignment of the capital gains inclusion rate to match the impact of the dividend tax credit would reduce the scope for tax planning,” it said.

Overall, increasing the GST and the capital gains inclusion rate would raise nearly $20 billion per year, the report suggested.

“Such a move would set the debt-to-GDP ratio on a downward trend if the new spending from the throne speech sits at the lower end of the range,” the report said.

“This downward trend is important,” it noted, adding, “a clear fiscal anchor is necessary to exert fiscal discipline and improve government credibility with credit rating agencies and the public.”

The group also considered various other potential tax reforms — such as raising the carbon tax, adopting a capital gains tax on primary residences and imposing wealth taxes — but ultimately concluded that the GST and capital gains tax are the most viable candidates for financing future spending.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.