COVID has been taxing, repercussions looming

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Pontiac Perspective by Peter Guthier


Pontiac Perspective by Peter Guthier

Among the many concerns COVID has presented is massive debt at all levels of government. The crisis has resulted in staggering numbers that must ultimately be dealt with. Governments will need new sources of revenue and possible cutbacks to expenditures. If there is to be a recovery without more damage to people’s income and basic living standards, some critical but prudent policies and actions are needed.
The main source of revenue for governments is taxation, and debt carries service charges.  Service charges require a large chunk of government revenue to do nothing more than allow governments to borrow more. The current very low interest rate hides the fact that we can expect much higher debt service charges starting in the near future; this must be considered when accounting for government debt.
The three main sources of tax revenue the federal government can control are income tax, sales tax, and capital tax. There are issues with each that must be considered before any major changes are made. A common suggestion is an extra income tax on the wealthy: for example, a direct “wealth” tax on all persons with incomes of over one million dollars a year. There are, however, several concerns with this type of tax. It has been tried in several countries and has failed – multimillionaires have simply become citizens of countries that do not have such a tax. And the amount of tax collected is not sufficient to make a significant difference in government revenues.
When the federal sales tax was introduced, it was set at 7%. This was later reduced to 5%. Increasing the sales tax rate tends to penalize those with lower incomes, even with the tax rebate. Further, this tax is extremely unpopular and any government increasing it would face significant opposition.
This leaves capital tax as a more likely source of additional revenue. A capital tax is placed on a corporation’s assets (rather than its income). It’s calculated on 50% of capital gains. The suggestion is that it could be raised to 60 or 70%. Part of the problem here is determining the capital gains. There are many loopholes and exceptions allowed and a good accountant or tax specialist can significantly reduce the taxable portion of capital gains. Plus, there is also the option of the corporation moving offshore to a tax haven.   
We expect to recover from the COVID pandemic, but many problems remain. The environment is a central issue. Proper care for our elders has proven
to be an urgent need. Artificial Intelligence (AI) will change much of the workforce and the government must be ready for this. The list continues and gets more complex in our integrated world.
All of this indicates that governments, especially federal and provincial, will have to be very careful and very specific in their budgeting, revenue collection and spending. Pre-budget consultations for the federal budget are to end on February 19 and an actual budget is expected shortly afterward. Handling the provincial and national debts will determine Canada’s financial and social environment for many years to come.