William O’Connell is a doctoral candidate at the University of Toronto’s department of political science.
During the pandemic, the federal government poured billions of dollars into Canada’s financial system through various Bank of Canada programs. While this intervention successfully avoided an economic collapse, it also boosted the profits of our financial institutions. It is high time they paid it back.
In last year’s budget, the Liberals made good on a promise of a one-time 15-per-cent tax on banks and insurers on income over $1-billion, alongside a permanent 1.5-per-cent increase in the tax rate for income above $100-million. This year, they are doing away with a rule that prevents financial institutions from being taxed on the dividends they receive from their equity stakes in other Canadian companies. The government projects this tax would create an additional $3.15-billion in revenue over five years.
This is the right thing to do. The current inflation problem appears to be driven by growth in corporate profits, rather than growth in wages. To tackle it, targeted fiscal policies such as the dividend tax are more effective than interest rate hikes.
More broadly, in the face of the current economic uncertainty, the government needs to embark on a major expansion of our social welfare system. But they need to find a way to pay for it, and the financial sector should be the one to help out.
This is the entire point of progressive taxation – that stable government, rule of law and social safety nets should be funded by those with the means. This is especially so when the financial sector has effectively been on the receiving end of taxpayer subsidies for years.
Dividends – whether from foreign or Canadian companies – are taxable income for individual holders. Yet, until the current budget released Tuesday is passed, large banks and insurers are exempt from tax on Canadian dividends. While the rationale for this policy is to encourage investment in Canadian companies, it amounts to a taxpayer subsidy on the banks’ balance sheets. Removing this subsidy is a welcome policy change.
In response to the new budget, the Canadian Bankers Association says that, “Strong banks are a hallmark of our country, and they are key contributors to durable economic growth for all Canadians.” That is precisely why they can weather this tax. While the global banking sector has been in turmoil since the collapses of Silicon Valley Bank in the United States and Credit Suisse in Switzerland, Canada’s banking sector has remained stable, much as it did in the global financial crisis of 2008. This tax provides a major source of revenue with minimal impact on the balance sheets of individual banks and insurers.
Our banks are more stable in large part because they are more concentrated: all the more reason to impose this tax. While much of the focus of the inflation debate has been on the grocery industry and its lack of competition, the same issue in financial services means Canadians pay significantly higher fees for banking and insurance than other countries. This helps keep our banks from pursuing risky strategies like we saw with Silicon Valley Bank, but it also means the banks should be expected to pay Canadians back when necessary.
There is a limit to how much the government can lean on the banking and insurance industries to finance its deficits. As the banks themselves were quick to point out after last year’s one-time tax, they were not the only ones who got a pandemic bailout. The government has to be careful not to upset the stability of the Canadian banking sector given the problems in the United States and Europe.
Canadian companies may also feel the pinch as banks and insurers reduce the portion of Canadian equities in their portfolios over time. Levelling the playing field for foreign and domestic equity investment may be particularly hard on less competitive sectors of the economy.
But this is a necessary sacrifice to pay for the government’s new major spending programs, which are necessary for the broader economy. Reducing the public subsidy the government provides to the banking industry is a good way to do that.
And while these taxes will indirectly help soften the blow of rising prices, more inflation could be on the horizon. The government needs to find new revenue to back its spending, otherwise continued deficits could add fuel to the inflationary fire.
In that context, the worst thing about asking the financial sector to cough up more is that it is still not enough. This year’s dividend tax is cheap and last year’s was temporary. Dental care for the uninsured, promised in Tuesday’s budget, is expensive and permanent. Absent meaningful changes to government revenue, an aging population and a soaring cost of living are going to put a significant strain on future budgets.