Bay Street star David Rosenberg, known for his forecasting skills, made the news last week by spreading rumours. The Globe and Mail reported on Feb. 16 that Rosenberg, famous for predicting the U.S. housing bust, told his followers that he had heard that Finance Minister Bill Morneau is planning to “soak the rich” in his next budget by raising taxes on capital gains. “It is a classic move to make everyone poorer, cloaked under the veil of redressing income inequality,” Rosenberg said in Breakfast with Dave, a tipsheet for which Rosenberg’s employer, Gluskin Sheff + Associates, charges $1,000 for an annual subscription.
The Globe didn’t say where Rosenberg got his information, so I assume Rosenberg didn’t either. Still, he might be onto something. On February 17, Prime Minister Justin Trudeau delivered a speech that likely disappointed many of the men and women who spent thousands of dollars to attend dinner with him. Trudeau told a black-tie-and-gown audience in Hamburg, Germany (text, video) that for too long, executives have been putting their shareholders ahead of their employees, their workers’ families, and the communities in which they operate. “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,” Trudeau said.
So now we know why Canada’s capitalists are getting nervous. Trudeau’s speech in Germany suggests a hardening of his resolve to do something about income inequality, which economists such as Nobel laureate Joseph Stiglitz and Canadian Jonathan Ostry, the deputy director of the International Monetary Fund’s research department, describe as a present danger to sustainable economic growth.
Last year, Trudeau and Morneau raised the income-tax rate of the richest to help cover a tax cut for the middle class. Canada’s prime minister didn’t talk about taxes in Hamburg, but it is reasonable to expect that he and his finance minister are looking for revenue. The latest forecast of the University of Ottawa’s Institute of Fiscal Studies and Democracy shows that rising interest rates threaten Morneau’s promise to contain Canada’s debt at current levels relative to gross domestic product. The next budget, still unscheduled but expected before the spring, will say a great deal about the government’s priorities. Sops for people like Rosenberg and his clients would appear to be lower on the list.
We all know the arguments against taxing capital gains, if in fact the federal government is considering doing so. You tax things you don’t want, and Canada wants capital. A new study sponsored by TMX Group says Canadian growth companies face a $4 billion shortfall in venture capital compared with the United States. Trudeau talks a lot about the middle class, but he also talks a great deal about creating an economy built on cutting-edge technology. David Dodge, the former Bank of Canada governor who now is an adviser at law firm Bennett Jones, has been warning since the U.S. election that Donald Trump’s plan to cut taxes could make it harder for Canada to attract the talent it needs to succeed at the innovation game. “We have very high marginal effective tax rates,” Dodge said (around the 47-minute mark) on the February 18 edition of CBC Radio’s “The House.” Dodge continued, “If you are going to compare yourself to being in Toronto or being in Texas or being in California, you are going to give up 20% of your income in additional taxes to be in Canada. And that doesn’t make Canada necessarily the most attractive place to be.”
This is the classical economist’s view of the world, and it should be taken seriously. But before we assume that a class war is imminent, it is worth considering other variables. Many executives now lament the populist backlash that threatens free trade and a laissez-faire approach to economic policy. But companies in Europe, the U.S. and Canada helped create the conditions that brought on Brexit and Trump by hoarding cash and using their post-crisis profits to repurchase stock rather than invest in operations. Trudeau’s point in Hamburg was that those companies now have a moral responsibility to help him and other leaders correct the situation. It would be a mistake to assume the global business community will recoil at the idea.
Trudeau’s thinking isn’t coming from union halls. For several years, Michael Porter, the Harvard University management guru, has been urging companies to better “share” profits with their employees and their communities. It may have taken the shock of the Brexit vote and Trump, but executives are starting to get the message. “We must become less obsessed by the next quarter and more by the next generation,” Sophie Brochu, chief executive at Gaz Métro, Quebec’s largest distributor of natural gas, told the Canadian Club of Montreal on February 13. “Fundamentally, our companies must become obsessed again by the creation of jobs and the preservation of jobs, quality jobs.” On February 20, Madeleine Paquin, chief executive of Logistec Corp., a handler of bulk goods and containers at 30 ports in eastern North America, used a speech at the same venue to nudge her fellow executives to invest in local start-ups, as Logistec has. “We have a responsibility to invest in promising enterprises that have the potential to become important vectors of growth for our companies and our economy,” Paquin said.
All things being equal, higher capital-gains taxes, or higher taxes of any kind, will hurt investment and job creation. But as I wrote in October, the companies and individuals that Trudeau is seeking to attract are concerned with more than profit and income maximization. Innovative companies want to be located near universities and other innovative companies, and modern workers are willing to forgo some salary in exchange for a higher quality of life. Canada’s relative openness to immigrants is also an advantage: lower taxes in Texas or California are of little use to an Asian engineer if he or she can’t obtain a work visa.
None of this guarantees that Trudeau and Morneau are coming for a bigger share of the earnings of Rosenberg and the capitalists he serves. While redistribution of wealth is (by definition) necessary to reduce income inequality, some forms of taxation could make it worse. The government could heed Dodge’s warnings. But don’t be surprised if it doesn’t, and don’t be surprised if the business community opts against outrage. The winners of globalization are beginning to accept that they have relatively little to be upset about.