Thank you, Mr. Chair and other members.

The 2024 federal budget had three noteworthy features, in my view. First, it allocated modest new resources to several important initiatives, including the school lunch program, affordable housing measures, the rollout of the dental care program and the new disability benefit.

Second, the budget reaffirmed its commitment to previously stated fiscal targets expressed in terms of a falling ratio of debt to GDP.

Third, in order to make those first two add up, the budget also contains some revenue measures, the most important being the capital gains reforms we're discussing today. I mention this because it's as important, in my view, to consider what the new fiscal resources are being used for as to consider how they are raised. Those new programs will make Canada a bit fairer and healthier. The fact that they will be funded with new revenues collected primarily from high-income Canadians—by narrowing a lucrative and unfair tax loophole—makes this combination of tax reform and the new programs the revenue will be used for a double-barrelled boost for fairness in Canada.

From my perspective as an economist, let me briefly highlight two important aspects of the capital gains reform. The first is the very unequal distribution of the gains and associated tax savings, and the second is the lack of connection between capital gains taxation and business capital spending.

First, there is no other tax loophole more closely targeted at high-income Canadians than the partial inclusion of capital gains. In 2021, the latest year of Revenue Canada data, 61% of taxable capital gains were claimed by Canadians with total income over $250,000 that year. That group makes up only 1.5% of tax filers, yet it claimed 61% of all the taxable capital gains and an even larger share of the tax benefits from partial inclusion, since they receive higher marginal tax savings than other Canadians. Of that group of high-income tax filers, 56% reported capital gains, on average, of $180,000 each. That was just the taxable part.

In contrast, seven-eighths of tax filers reported income below $100,000 that year. Fewer than 10% of them reported any taxable capital gains at all, most of them very small, and combined, they received just 15% of all capital gains and an even smaller share of the tax benefits. Capital gains are concentrated precariously among the highest-income households, as are the favourable tax benefits offered by the current tax system.

The vast majority of Canadians will not be affected directly by this change. Most do not receive capital gains at all, and most of those who do receive gains well under the threshold for the higher inclusion rate. However, those Canadians will benefit from the new programs I mentioned that these revenues will help fund.

Second, some argue that reducing capital gains exemptions will discourage business capital investment, but the economic evidence shows no connection between capital gains exemptions and rates of business investment in new capital, research or productivity. Canada's business investment, especially in machinery and equipment, has been declining since the 1990s. Business and capital taxes have been significantly reduced in that same time. In the 1990s, when the capital gains inclusion rate was 75% and the federal corporate tax rate was 28%, Canadian business invested 5.6% of national GDP in new machinery and equipment. In the last 10 years, with the inclusion rate at 50% and a 15% corporate tax rate, investment averaged 3.5% of GDP, two full percentage points of GDP lower. Research and development spending has also declined in the same period, as has productivity growth. Many complex factors determine business investment, and reversing this decline is an urgent economic priority. I have published my own research on the causes and consequences of slow investment.

It is clear that tax factors are, at most, a second-order determinant of business investment, and it is not credible to blame taxes for the poor performance of Canadian business investment in recent years. Indeed, in some ways, excessively favourable capital gains taxation can undermine corporate investment spending by distorting the choice between different capital structures and encouraging cash flow stripping from corporations.

In sum, this reform is important for improving the fairness of Canada's tax system, reducing distortions that encourage tax avoidance and underinvestment and, just as importantly, helping fund new programs from the federal government that will make a positive difference in the lives of millions of Canadians. I recommend the passage of this legislation.

Thank you again for the opportunity to appear.