Ontario's little capital gains game

May 1, 2000

On budget day, Ontario's Finance Minister Ernie Eves was full of extravagant praise for his tax cuts. The budget papers were full of impressive looking examples of tax savings resulting from the change in personal tax rates introduced along with his "made-in-Ontario" tax system.

He managed to sound even a little apologetic when he declared to his news conference that there was nothing in the income tax cuts for anyone earning over $60,000 a year - beyond the dollar amounts that anyone earning $60,000 would save. And only a naysayer would point out that, when the impact of the tax cuts on Ontario's surtaxes are taken into account, it isn't really true.

And he delivered a spirited defence of his $4 billion corporate tax cut - making Ontario competitive with neighbouring US states, of course. The political potion that cures all ills - and explains all favours for the rich and privileged.

Again, a quibbler like myself might point out that before the cuts, Ontario's corporate tax system was already seen to be "competitive" in most studies, making Mr. Eves $4 billion nod towards the Business Council on National Issues look more like a gratuity than an economy-building move.

But that is really a detail, because what is really interesting about Mr. Eves' performance on budget day was something he did not talk much about - his extraordinary capital gains tax give-away.

He didn't have much of an explanation as to why he decided to go beyond the Federal Budget's capital gains cuts, and make a special request of Ottawa to implement it. He was clearly nervous talking about who would benefit. He brushed off questions by saying that the capital gains cut is good news for everyone - everyone has capital gains.

Well, maybe.

But the facts - contained right in his budget papers document - say otherwise.

Working with a table in the budget papers designed to show how much more generous the government is to lower and middle-income taxpayers than to higher-income taxpayers, it is possible to estimate the overall impact of the Government's personal income tax cut proposals - including the personal income tax side of the capital gains break.

It shows that 39% of the benefit from the Government's 2nd term tax cuts - that's last year's tax cut plus the changes announced on May 2 - goes to the highest-income 10% of Ontario taxpayers. 27% of the benefit goes to the highest-income 5%. Just under 10% of the benefit goes to the highest income _ of 1% of taxpayers.

Mr. Eves certainly managed to keep that little gem under his hat, didn't he.

The median taxpayer - income, $35,000 -- saves $330. The average taxpayer in the top _ of 1% of taxpayers - income over $330,000 - saves $9,700.

Why the discrepancy between the seemingly endless series of individual taxpayer "examples" cited in the budget and the overall impact?

The answer? Capital gains. None of the examples take into account the Government's elimination of one third of its tax on capital gains.

Mr. Eves is right. A great many people make capital gains. But most people make their capital gains inside their RRSPs and RRIFs, where they don't incur tax anyway. So the Conservatives' capital gains tax break doesn't affect them.

Taxable capital gains are a different story. Capital gains taxation has a substantial impact on the overall distribution of benefit from the tax cuts because, of all the major sources of individual income, taxable capital gains are the most unevenly distributed.

It is true that some people in every income group report capital gains income. The official taxation statistics produced by Revenue Canada reveal that, in 1996, the lowest-income 27.5% of taxpayers reported a total of 3% of taxable capital gains.

But the real story is at the other end of the income scale. The 1996 personal income tax statistics for Ontario show that, in 1996:

  • 68% of taxable capital gains were received by the 2.9% of Ontario taxpayers with reported 1996 incomes above $100,000
  • 58% of gains are received by the 1.3% with incomes over $150,000
  • 45% of gains are received by the 0.75% with incomes over $250,000

Not the most democratic distribution, to be sure. But it certainly helps to explain why the well-off do so well in Mr. Eves' budget.

The capital gains tax break explains why $1 billion of his $2.5 billion in personal income tax cuts goes to the highest-income 10% of taxpayers - those who earn more than $75,000 per year.

And the profoundly unequal distribution of the benefit from the capital gains tax break helps to explain why Mr. Eves answers questions about it so quietly, and so incompletely.