Paul L. Caron

Friday, December 7, 2012

The Fiscal Cliff, Canadian Style

FlagThe Globe and Mail:  Surmounting the ‘Fiscal Cliff’ -- Canadian Style, by Jonathan Rhys Kesselman (Simon Fraser University, School of Public Policy):

Grand Bargains do not always come from the expected places. As the U.S. Administration and Congress struggle to find a solution before plunging over the “fiscal cliff,” they might cast their eyes in a northerly direction. Part of a compromise solution could be crafted from the experience of Canadian tax policies for capital incomes.

One central part of the conflict between the Democratic administration and Congressional Republicans has been the top two income tax brackets – whether they should be hiked by 3 and 4.6 percentage points to restore the Clinton-era rates of 36 and 39.6 per cent or whether some other way can be found to generate the required revenues.

Surprisingly overlooked in discourse over how to surmount the “fiscal cliff” are the much more dramatic prospective hikes in tax rates on capital incomes. The top tax rate on long-term capital gains will rise from the current 15 per cent to 20 per cent – plus a new Medicare tax of 3.8 per cent, making the total hike more than half. The top tax rate on qualified dividends will soar from the current 15 per cent to the new top bracket rate of 39.6 per cent – plus the 3.8 per cent Medicare tax, for a near-trebling of the total tax rate.

These extreme tax increases on capital incomes will adversely affect incentives for savings and investment; they will also sharply impact investor portfolio strategies and corporate financial policies. Even now corporations are scrambling to pay out special dividends so that their shareholders will avoid prospective tax hikes in the new year. ...

The proposed reforms offer attractions for both sides in confronting the “fiscal cliff.” The Administration could secure its desired hikes to the top bracket rates, while Republicans would gain relief for both investors and the economy. A cliff need be not only a place of peril; it can also be a place for enhanced vision – even northerly vistas.

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