Liberal Leader Justin Trudeau’s election promise to increase taxes on big banks and insurance companies to help pay for the COVID-19 recovery received failing grades from a number of experts.
On Wednesday, Trudeau pledged to raise the corporate tax rate on large banks and insurance companies by three percentage points – to 18 per cent from 15 per cent – on earnings over $1 billion. A re-elected Liberal government would also establish a Canada Recovery Dividend meant to help fund the next four years of Canada’s recovery.
The proposal, which the party estimates will raise $2.5 billion per year, came as Canada’s biggest banks posted soaring profit growth.
RBC, TD, BMO and CIBC all beat analysts’ expectations with double-digit quarterly earnings this week, marking a sharp bounce-back from the earlier days of the pandemic.
But a tax increase aimed narrowly at Canada’s financial behemoths would likely hurt consumers, investors, small businesses and employee wages at the affected institutions while raising little revenue, several economists and taxation experts say.
“There is nothing good to say about the policy,” Jack Mintz of the University of Calgary told Global News via email.
Anthony Noce, professor of economics at Concordia University, blasted the idea of a tax-hike narrowly targeted at large financial institutions, warning that banks and insurance companies would pass at least part of the extra costs onto customers, likely resulting in higher fees and prices for some financial products.
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The tax would also translate into higher interest rates on loans — something that would hurt small and medium-sized businesses especially, Mintz predicts. And the measure may also lead financial institutions to lower the interest rate they pay on bank deposits, he adds.
Higher taxes could also weigh on the banks’ stocks and, by extension, many Canadians’ investment returns, says Ian Lee, a professor at the Sprott School of Business at Carleton University.
“Your instinctive reaction may be sock it to the banks,” Lee says. “Sit back and go look at your company pension plan — if you have a private company pension plan — and ask them if they have investments in the banks.”
Canadian banks paid $21.3 billion in dividends in 2019, according to the Canadian Bankers Association (CBA).
Both Noce and Lee say higher taxes could also result in slower-growing wages for bank and insurance company employees.
Canada’s banking sector employs more than 280,000 employees, according to the CBA.
Noce also warns the tax wouldn’t generate significant inflows for federal coffers.
The annual revenue boost of $2.5 billion projected by the Liberal Party is “paltry in comparison to the amount of spending that’s being done by or proposed by the government,” he says.
Canada was likely due for a corporate income tax increase anyways after Ottawa signed onto a U.S.-led initiative to establish an international floor on corporate tax rates, he says.
In July, Canada was part of 130 countries joining a new deal under the umbrella of the Organisation for Economic Cooperation and Development (OECD) that calls for a global minimum tax rate for multinationals with more than roughly $1 billion in revenue. The agreement is expected to take effect in 2023.
The Liberals’ proposed bank tax, which the party said would take effect in 2022-23, appears to pull forward a partial version of a comprehensive corporate tax hike that was likely already in the cards, Noce notes.
“Given that the federal government is in desperate need for more revenue to fund its deficit spending and that a global minimum rate would make Canada generally no less competitive if it were to increase its current rate by three percentage points on a subsector of firms that post more than $1 billion in profits … Trudeau’s announcement is politically astute, but dishonest in its purpose,” Noce said in additional comments via email.
On Thursday, CIBC’s chief executive Victor Dodig warned about narrowly targeted government policies.
“My great hope is that you don’t have intervention in any particular industry sector, because that doesn’t actually attract foreign capital,” he said during a conference call to discuss the company’s earnings the day after Trudeau’s campaign pledge.
“We need capital and we need people to come to Canada to make the country stronger and to make the country better.”
Dodig said he would not comment on specific election promises but wanted to remind investors of the work banks did during the early days of the outbreak, when they distributed pandemic stimulus funds and deferred on loans for clients.
— With files from the Canadian Press
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