Unraveling the Complexities: Politics, Taxation, and Sound Economic Policy

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Source Article: Good taxation policies don't need slick videos to make a case for them

The Paradox of Tax Policies: Politics vs. Pragmatism

Albert Einstein famously said, "The hardest thing in the world to understand is income tax." While the context of this quote is debatable, there's no denying the inherent complexity of taxation systems worldwide. As a veteran tax practitioner and specialist, Kim G C Moody, FCPA, FCA, TEP, Founder - Moodys Private Client / Moodys Tax, has learned that the practice of taxation is inextricably linked to politics—a reality that often overshadows sound economic policies.

In Moody's early career days, over thirty years ago, he naively believed that good tax and economic policies would always take precedence. Little did he know that political motivations frequently trump pragmatic policymaking. The recent proposal in Canada's 2024 federal budget to increase the capital gains inclusion rate perfectly exemplifies this paradox.

The Capital Gains Conundrum: Rhetoric vs. Reality

The proposal to raise the inclusion rate from 50% to two-thirds (with individuals entitled to the 50% rate for the first $250,000 of annual capital gains, but not corporations or trusts) was introduced with a flurry of rhetoric. It was portrayed as a measure targeting only the ultra-wealthy "rich" who had "already made their money," a step towards "intergenerational fairness," and a matter of simple "fairness," as the Prime Minister himself stated.

In an unusual move, Justin Trudeau released a three-minute video defending the measure, replete with misleading statements echoing the same lines. While the slick, "cute" video garnered millions of views, Moody's rebuttal video, albeit less polished, pointed out the flaws in the government's messaging and received thousands of views.

The Consequences of Poor Tax Policies

Beneath the political rhetoric lies a harsh reality: the capital gains inclusion rate proposal is simply poor taxation and economic policy, a revenue-generating measure masquerading as fair policymaking. It disrupts the fundamental principle of tax integration, incentivizing Canadians to invest individually rather than through corporations or trusts to access the $250,000 threshold, even when the latter may be more sensible from a non-tax perspective.

Moreover, increasing the taxation rates on capital gains discourages investment in Canada by reducing the after-tax returns on the risks investors take. Countries like Canada rely on investors willing to risk their capital to start and grow businesses that employ Canadians. Small business owners and startups, including those in the technology sector, do this daily. If after-tax rates of return are better elsewhere, investors will undoubtedly redirect their capital, exacerbating the exodus of successful individuals and their investment dollars from Canada.

The Way Forward: Pragmatism over Politics

In today's divisive world, fueled by social media's dopamine-inducing effects, it's easy to form opinions influenced by political ideologies and slick marketing campaigns. However, as Calvin Coolidge said in 1924, "No matter what anyone may say about making the rich and the corporations pay the taxes, in the end, they come out of the people who toil. It is your fellow workers who are ordered to work for the government, every time an appropriation bill is passed. The people pay the expense of the government, often many times over, in the increased cost of living. I want taxes to be less, that the people may have more."

Good politics should involve implementing sound policies after seeking advice from subject-matter experts, not merely agreeing with one's ideology. The proposal to increase the capital gains inclusion rate and the vigorous defence by our current government may be good politics, but they remain poor policies. Much of the resulting increased taxes will be paid by hardworking Canadians "who toil."

In the end, we must strive for pragmatism over political posturing, recognizing the profound impact of taxation policies on individuals, businesses, and the economy as a whole.

A Partnership for Holistic Wealth Management

To navigate this complex financial landscape, I have partnered with one of Canada's leading private wealth management firms serving high-net-worth clients nationwide. This firm offers professional investment management and comprehensive wealth planning from a client-first perspective, providing affluent Canadians access to sophisticated strategies and solutions usually reserved for the ultra-affluent.

Driven by a "capital preservation first" philosophy, the firm generates consistent, tax-efficient returns uncorrelated to public markets. Through my relationship with this firm and other key industry professionals and firms, my clients gain exclusive access to alternative investments such as private equity, private real estate, precious metals, commodities, government-sanctioned flow-through tax structures, and tax-efficient corporate insurance solutions – all designed to fortify and de-risk a client's personal, family, business and estate assets against economic threats, inflation and higher taxes.

Complimentary Portfolio Evaluation

As a valued reader, we are offering a complimentary portfolio evaluation to discuss how to fortify and de-risk your portfolio against economic threats, inflation, and higher taxes. To schedule your complimentary portfolio evaluation, email us at [email protected] or use my Calendly Link.

During this no-obligation consultation, we can provide insights into how we can help you navigate the 2024 budget changes to ensure your portfolio is resilient to the tax changes and aligned with your long-term financial goals.

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