Montreal Economic Institute Warns of Shortfall in PBO’s Tax Revenue Estimates
The Parliamentary Budget Officer (PBO) may be overly optimistic in his estimates for federal income tax revenues from changes in capital gains taxation. Critics warn that it may instead have potential negative consequences for the Canadian economy.
In a report released on August 1, the PBO projects an additional $17.4 billion in revenue from 2024 to 2029 due to the new policy, which raises the capital gains inclusion rate for corporations, trusts, and high-earning individuals. However, even their highest predicted revenue intake of $5 billion for the 2024-2025 fiscal year falls below earlier estimates from the Department of Finance, indicating potential discrepancies in projections.
The Montreal Economic Institute (MEI) is challenging the PBO’s forecasts, suggesting that actual revenue gains could fall short by nearly $2 billion. MEI economist Emmanuelle B. Faubert points out that a “fire sale” of assets prior to the policy’s implementation likely inflated first-year revenues, creating an unsustainable spike that won’t be replicated in subsequent years.
Concerns extend beyond revenue forecasts to the policy’s broader economic impact. Faubert warns that the tax increase could slow down investment cycles, particularly affecting startups and entrepreneurs. This slowdown might also reduce the number of projects receiving funding and limit growth opportunities in the business sector.
Public sentiment appears to align with these concerns. An MEI-Ipsos poll reveals that 60% of Canadians fear negative economic consequences from the tax increase, while 70% believe it will impact the middle class.
Related: Canadian Families Now Spend More on Taxes Than Basic Necessities, Study Finds
The PBO maintains that the new policy, implemented in June 2024, is expected to substantially improve the federal budget balance over the next five years.
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