The federal government still has time to improve the 2024 budget—will it?

The following text is adapted from a speech delivered by David Macdonald, senior economist at the Canadian Centre for Policy Alternatives, to the Senate’s committee on Bill C-69, the legislation which would implement the 2024 federal budget. The remarks have been edited for context, clarity, and style.

Members of the committee,

Thank you for your invitation to speak today on Bill C-69. I’d like to restrict my opening remarks to four key areas—the capital gains inclusion rate, the global minimum tax, changes to Employment Insurance (EI), and the national school food program.

As a long-time advocate for a higher capital gains inclusion rate, I am pleased to see that we are making progress on this issue. From 1988 to 2000, we had similar—or even higher—inclusion rates, which define how much capital gains income is subject to taxation. These higher rates did not have the $250,000 exclusion, where any annual capital gains less a quarter million dollars per year have a lower inclusion rate—and Corporate Income Tax (CIT) was double what it is today.

At the time, like today, investors were concerned that investment would fall due to higher capital gains—but investment actually doubled over this period as a proportion of GDP, rising from 2.6 per cent of GDP for machinery and equipment to four per cent, and from one per cent of GDP to 2.1 per cent for intellectual property. In fact, investment in machinery and equipment in 2000 was higher than it is today—at four per cent of GDP, compared to today’s three per cent.

Companies do not invest to chase low tax rates, they invest because they think they can make money. Corporate investments follow the business cycle—a strong economy leads to strong corporate investment. Companies capitalize on growth, and let the accountants figure out how to reduce taxes after the fact.

A higher inclusion rate equalizes treatment between companies in different sectors. Companies that buy and sell assets should not get a tax preference compared to companies that sell goods and services—although that’s what the different treatment for capital gains allows.

In the long term, we should move to full inclusion—that is, a 100 per cent inclusion rate, which simply means that every capital gains dollar is subject to taxation, just like every dollar from a worker’s salary. As the 1962 Carter Commission on Taxation famously said “a buck is a buck” whether you are trading stocks or sweeping floors.

That full inclusion should include an inflationary increase to the capital purchase price. It should also differentiate between longer-term holdings,such as family cottages or farms, which could get a very small inclusion—whereas short-term capital gains (from stock trading for example) would be at full inclusion.

It is also worth considering how the federal government will use the proceeds from reducing the tax break on capital gains. An important driver of capital gains over recent years has been for real estate investing, due an out-of-control housing market. Investors are making substantial capital gains at the expense of people seeking housing—and the proceeds of a higher inclusion rate will help to fund the expansion of more affordable housing. That means the people profiting the most off high housing prices will, at least partially, be paying for important moves to limit the housing affordability crisis.

It is also encouraging to see global minimum tax legislation proceeding, which would institute a minimum 15 per cent corporate income tax on all companies making money in Canada, no matter how they try to shift those profits to tax havens in order to pay no taxes. This would be an important tool to combat the corporate practice of shifting profits from Canada to low or no tax jurisdictions. The epidemic of multinationals using various means to avoid their fair share of Canadian corporate income taxes, while relying on Canadian infrastructure, workers, and legal system, must be addressed. The minimum tax is expected to raise $3 billion a year starting in 2026-27. It is crucial to ensure that companies making money here are paying taxes here as well.

The changes to Employment Insurance in this budget are disappointing. Many EI experts were consulted at length over the past year about improvements following the pandemic and emergency benefits experience. Unfortunately, the federal government has changed very little, although the budget does continue a limited EI extension for seasonal workers that would have expired in the fall.

The senate should consider a new EI stream called the “EI Emergency Response Measures” which the ESDC minister could trigger for a particular geographic area in the case of evacuation for wildfires or floods, or even broader events like another pandemic—basically, any event where workplaces are shut down. In this model, triggering these measures would immediately relax EI access rules for workers applying in disaster zones. It would eliminate the one week waiting period, reduce the hours needed to access EI benefits, and provide a guaranteed minimum amount of benefits.

We still have no institutional employment insurance response to ever-growing threats to worker’s livelihoods, whether they be climate or health related. As shown during the pandemic, cash supports are critical to keeping workers and families afloat during emergencies.

Finally, I’d like to commend this budget’s important step forward on the national school food program. Observers have been discussing this prospect for a long time, and advocating for such an expansion. With budget 2024 we are now seeing money flowing to design the basics of the program. This program should be universal—where all children receive a healthy and free lunch at school every day, eliminating the stigmatization that programs can bring if only some students benefit, but the current program is not universal. A universal national school food program would likely cost $2.5 billion a year, and the measures in budget 2024 only commit roughly $200 million a year. Nonetheless, it is an important start to establish provincial and territorial agreements to implement a broader program.

Thank you for your attention, and I look forward to your questions.