Why Bay Street and Trudeau don’t see eye to eye

Prime Minister Justin Trudeau certainly has Bay Street in a tizzy. David Rosenberg, a famous economist who works for high-end wealth manager Gluskin Sheff + Associates, this week advised readers of his $1,000-a-year newsletter to sell Canadian stocks and convert their loonies to other currencies before the March 22 budget ruins them. “This promises to be a tax-grab budget that would have made the likes of Herb Gray very proud if he was still alive,” Rosenberg wrote on March 13, according to a subscribers-only report in the Globe and Mail.

Rosenberg, known for prescient forecasts based on hard data, has been spreading rumours for at least a month that Trudeau intends to raise taxes on capital gains. There has been no confirmation of this, but the very thought of it is making capitalists upset.

The Globe, which targets the same high rollers who might turn to Gluskin Sheff for financial advice, reported (subscribers only) that the conjecture over taxes was “spreading fear” amongst Canadians who seek reward from buying low and selling high. An Ottawa-based tax adviser said his firm already was talking to clients about how they can “protect themselves.” One piece of advice: sell now, while the rate on capital gains is only 50 percent. Billionaire investor Stephen Jarislowsky, whose firm manages $35 billion in assets, wrote an op-ed for the Financial Post that says higher taxes on capital gains would, “hammer another nail in the coffin for Canadian investments, particularly at a time when our economic outlook is already relatively weak.”

Now, I can’t help wonder if Langevin Block is punking Bay Street. When (if) Morneau leaves the rate on capital gains unchanged, he will (would) look like the protector of the business class. By overreacting to rumours of higher taxes, Canada’s millionaires and billionaires are blowing political capital they might have used to make the case for lower ones. The sop to Bay Street in Budget 2017 could be leaving capital gains rates unchanged. Makes you wonder what Morneau might really have in mind?

But enough idle speculation. I don’t know what’s in the budget, and I doubt Rosenberg does either. Still, the past few weeks have been informative. If it wasn’t clear before, we know now that Trudeau is serious about the inequality story. And Bay Street’s response suggests they are struggling to adjust to a world where finance no longer is the focus point of economic policy. The priority of Canada’s government is social stability.

This year was supposed to be all about innovation. Trudeau reset the benchmark in Hamburg, Germany on February 17, delivering a direct message to business leaders: “It’s time to pay a living wage, to pay your taxes and to give your workers the peace of mind that comes with stable, full-time contracts.” On March 9, cabinet minister and economist Jean-Yves Duclos hosted reporters at the National Press Theatre for a seminar on the weakened state of Canada’s middle class. And yesterday in Frankfurt, Morneau told a gathering of international bankers that, “we need to better share our success with others, by implementing policies that ensure that the benefits of economic integration of our citizens—the middle class—rather than the wealthiest.”

Morneau mentioned that he soon would be presenting his second budget. He said nothing of taxes, although it is fair to wonder whether he might be seeking new revenue.

“I will be confirming that Canada plans to continue doing what confident, optimistic countries do—invest in our people, our communities and our economy,” Morneau said at a conference hosted by the International Institute of Finance, an association of about 500 of the world’s biggest banks and insurance companies. “I will also be taking steps to create a culture of lifelong learning, helping people develop the skills they need at every stage of their life to succeed in the new economy.”

The usual suspects have said the usual things about Trudeau’s pre-budget rhetoric. Those who derive most of their income from asset-price appreciation, rather than salaries, say higher taxes would unfairly punish risk takers. The tech crowd—or least, some who claim to know the minds of tech entrepreneurs—says the government appears set on making it more difficult to lure talent to Canada. The Fraser Institute, a think tank that advocates cutting taxes to the lowest level possible, questions whether income inequality is even a problem. “Canada’s middle class is actually doing much better relative to past decades based on a host of indicators,” Charles Lammam and Hugh MacIntyre, two from Fraser’s stable of experts, wrote in an op-ed published in the Ottawa Citizen on March 17.

I’ve been where these people are. After Morneau released his 2016 budget, I criticized the emphasis on coddling middle-class families, when stagnating economic growth seemed the bigger problem. Morneau had his priorities reversed, I thought at the time. And I still would think that, if not for Brexit, Trump and the existence of a former Conservative cabinet minister who thinks she can become leader of the Opposition by appealing to our worst instincts. It’s true that most measures of income inequality suggest the situation in Canada isn’t all that bad. But those data also tend to be years old, as it takes time to collect them and complete the analysis. Real-time indicators suggest strain. Household debt is at record levels, while average wages are growing only fast enough to keep up with inflation. Entire industries are collapsing, forcing thousands of people to go back to school or take jobs they never wanted. None of this portends a pleasant future.

Instead of waiting for things to get worse, Trudeau appears to want to try to get ahead of the problem. This will be difficult for conservatives to accept. If you believe that a government’s first priority should be to do no harm, then you will struggle to support policies designed to correct a situation that isn’t yet supported by data. However, the International Monetary Fund has built a compelling case over the past few years that income inequality is an important determinant of sustainable economic growth. Its work shows that marginal tax increases have little effect on economic growth, provided the revenue is used to pay for things such as education and healthcare. One of the reasons is that redistribution of wealth avoids the social disruption that now plagues the U.S. and Britain. Those countries will be beset by political upheaval for years. Little of substance will get done, as partisans fight and governments change. The economy will suffer as a result.

Bay Street appears not to have bought in yet. At least not fully. To his credit, Jarislowsky offered Trudeau and Morneau a different target: rather than wealth generators like him, the government should go after the chief executives who make millions running companies they had no part in creating. Another good idea is one touted by Emmanuel Macron, the independent centrist who is the favourite to win the French presidency. Macron, a former investment banker, would scrap France’s wealth tax on everything with the exception of capital gains from real estate.

The policy would reward those who build companies that employ people, and discourage investment that does little but enrich real-estate agents and speculators. I’m sure Bay Street and the conservative think tanks can come up with with some ideas of their own. But they ought to hurry up and propose something new. The government is moving on, with or without them.