Kim G C Moody’s Musings – 1-1-1 Newsletter For October 16, 2024
One Comment About Taxation – The Proposed Federal Vacancy Tax on Residential Land – Crazy Idea!
What is a great solution / response to many of our country’s issues? Well, a tax of course!! Taxes can solve everything! Climate change is an issue? Well, a carbon tax of course! Foreigners are buying too much Canadian real estate? Well, speculation tax, a purchase ban and underused housing taxes of course! Short-term rentals are a community problem and causing housing challenges? Well, a prohibition on the tax deduction of expenditures of course! The rich are making too much money? Well, tax them more of course! Wealth disparity is a problem? Well, let’s think about a wealth tax or an estate tax of course!
Former United States President Ronald Reagan stated the following in 1986: “Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it”.
Brilliant summary of our current government’s approach.
With Canada’s housing challenges, the issue can definitely be solved by taxation, right?? For sure!
One of the “tax solutions” proposed by the federal government in the 2024 Budget was that they would consider introducing a new tax on residentially zoned vacant land and would launch consultations later this year. On October 8, 2024, the government released details of such a consultation which interested stakeholders will be able to provide their views until December 31, 2024.
The consultation paper sets out its policy rationale by stating that the implementation of the tax would be intended to encourage the development of land into housing (rather than leaving it unused), to discourage speculative holding of land (by making it more costly to keep land undeveloped) and to provide a source of revenue for various orders of government, which apparently could be used to fund the construction of more new homes.
This policy rationale is so simplistic it’s laughable. The consultation paper goes on to ask basic questions that it wishes interested parties to address by first asking whether a vacancy tax would be an effective policy response to incentivize housing development. The next dozen or so questions assume that the answer to the first question is “yes” and asks how the proposed tax could operate. A balanced consultation would be much more inviting on both sides of the issue.
Over my career, I have acted for many owners of real estate including land developers, home builders, commercial landlords and others. The key asset for these organizations is land. Once land is acquired, it can take years to develop, rent and / or sell. There are numerous factors – many beyond the control of owners – that influence quick development and include municipal zoning restrictions, rising costs (like interest rates that may be applicable on borrowed funds), contamination clean-up requirements, financial downturns in the economy, partner disputes and other matters.
A proposed vacancy tax wrongly assumes that “greedy landowners” are simply holding onto their properties until the “time is right” where they can maximize profits. There is no doubt that most landowners wish to get proper returns on their investments but to think that owners are simply hanging onto their properties at the expense of people who are lined up at the door to buy their finished product shows a complete misunderstanding of the risks and rewards of entrepreneurship.
I know I shouldn’t be surprised by this kind of simplistic thinking from our current government and its supporters but believe me, I am. If a vacancy tax were to be implemented, do such people honestly think that holders of land would be able to influence all of the situations to dispose or develop their properties to avoid the tax? If so, such people should spend even a week or so shadowing, for example, an owner of a home building company. It’s not easy dealing with all of the issues involving land development.
Let’s assume, for the sake of argument, that there are indeed a large amount of greedy landowners that are holding onto their land. Would the imposition of a vacancy tax “move the needle” to force them to sell or develop their land? Absolutely not. Instead, the imposition of a vacancy tax could cause significant liquidity problems for many landowners. It may force such owners to sell their holdings at prices, even if they could, at prices far below their original acquisition costs thus incurring losses. Or for those that can afford to pay the tax, they would simply pass along those additional costs to the ultimate buyers thus forcing housing prices up. Brilliant.
Want some research that government interference isn’t helpful? Well, ever since the provincial NDP came to power in B.C. in 2017, they have introduced many housing initiatives including a speculation tax,housing targets for municipalities, short-term-rental rules, historic zoning changes and a home-flipping tax (designed along the lines of the ridiculous federal flipping tax). Have those measures helped? “Despite countless measures and additional paperwork and other requirements, we’re exactly where we started,” said Andrey Pavlov, professor of finance at Simon Fraser University’s Beedie School of Business in a recent interview that discusses some of his research on the matter.
There is nothing more powerful than the market or, as Scottish economist and philosopher Adam Smith said in his 18th century writings, an “invisible hand”, a metaphor that describes the incentives which free markets sometimes create for self-interested people to accidentally act in the public interest, even if it was not intended.
Additional taxes are rarely the answer. Instead, government should look in the mirror to see if any of their policies are contributing to an issue. In housing, for example, government immigration policy contributes greatly to those challenges.
With respect to the consultation, I’ll answer the first question and dispense with the other dozen. No, a proposed vacancy tax will not be effective.
For the government, please consider this column as providing you my feedback before the December 31, 2024 deadline.
It’s time to stop taxing everything that moves.
One Comment About Leadership – Good Leaders Don’t Follow the Crowd
I’ve written about this topic in this newsletter before, but I think it’s worth repeating. Good leaders don’t follow the crowd.
And in this day and age, there are no shortage of “crowds” that leaders and people in general can follow. Social media makes it easy for trends to be “cool”. Some “trends” – like the “diversity, inclusion and equity” nonsense – are dangerous, discriminatory and disgusting. But many leaders and larger organizations proudly trumpet out this announcement on their websites and marketing messages as if it’s a badge of honor. Nope, it shows you / the organization like following trends blindly without much thought about the overall consequences to you, the people you lead, your community and your country.
I have found a simple guiding principle helps me to determine whether or not I am interested in a “trend”/ “crowd”: is the trend / crowd divisive in its message? Does the crowd / trend treat people with dignity regardless of their ethnicity, sexuality, religion and other identifying factors? If not, I generally want nothing to do with it and I’m happy to not follow the crowd and speak up.
Leaders, what are your guiding principles on whether or not you will follow the crowd?
One Comment About Economics: Parliamentary Budget Officer Report on Purchasing Power of Canadian Households Since 2019
On October 8, 2024, the PBO released a report on the purchasing power of Canadian households since 2019. Of course, this period included pre-COVID, the COVID era and post. Such a time frame included low inflation, a massive amount of government handouts, hyper-inflation and now a period of declining inflation.
From the Highlights section of the Report:
- In the first quarters of the COVID 19 pandemic, prices rose well below the Bank of Canada’s 2% inflation target, while household incomes were supported by government transfers, leading to improved purchasing power for all income quintiles.
- The purchasing power of most households was higher in the first quarter of 2024 than in the last quarter of 2019. However, since 2022, rising inflation and tighter monetary policy have eroded purchasing power, particularly among lower-income households.
- Due to the composition of their family wealth, the investment income of households in the highest quintile grew faster than their interest payments. Because this net increase in income outpaced inflation, the average purchasing power of these households improved in 2023.
- For households in the other income quintiles, interest payment increases were higher on average than investment income payments in 2023. As a result, the average purchasing power of households in the third and fourth quintiles stagnated, while it deteriorated for the two lowest quintiles.
- Purchasing power trends varied from province to province. Quebec, Ontario and British Columbia are among the provinces that saw an increase in purchasing power, while Newfoundland and Labrador, Nova Scotia and Alberta saw a decline. For these provinces, inflation offset the increase in disposable income. As for the territories, purchasing power for all households was among the highest in Canada since the last quarter of 2019.
The Report is very interesting and worth a read. I find the quote in the second bullet above very telling: “…since 2022, rising inflation and tighter monetary policy have eroded purchasing power, particularly among lower-income households”. This is very sad since it’s well known and proven that inflation is much harder on lower-income people than higher income.
As the famous U.S. economist, Milton Friedman once said: “Inflation is the one form of taxation that can be imposed without legislation”. He also said: “Inflation is caused by too much money chasing after too few goods”.
Totally agree. Governments around the world – including Canada – have been very irresponsible with their fiscal policies especially during the COVID era. There are consequences to this. With the lower income people feeling it the worst, it’s not surprising that demand for change has been growing fast. It can’t come soon enough.
Again, spend some time with the PBO Report…it’s eye-opening.
Bonus Comment – Quote From Margaret Thatcher – Former U.K. Prime Minister – About Not Following the Crowd
“Don’t follow the crowd, let the crowd follow you”.
Leaders, are you following the crowd blindly?
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