New taxes would be a mistake. Freeland is still likely to hike levies on corporations and the wealthy

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Federal Finance Minister Chrystia Freeland knows hiking taxes would be a mistake.

But she’s still likely to raise levies on the country’s largest companies and wealthiest citizens in Tuesday’s budget.

Increasing government revenues is the only way to square Ms. Freeland’s repeated pledges to respect the fiscal anchors she set last year and pay for the new programs Prime Minister Justin Trudeau has scattered like candy across the country in recent weeks.

“Tax hikes are a tool that the Liberals have previously reached for, with increases in top marginal personal tax rates, alternative minimum taxes, and more recently, higher taxes on banks and insurers,” said Avery Shenfeld, chief economist at CIBC, in a report Friday.

In Ottawa and on Bay Street, discussions about tax hikes are focused on two possible scenarios. Economists and policy shops, such as the Business Council of Canada, say the Finance Minister is considering a tax surcharge on companies in sectors the government deems to be excessively profitable. Ms. Freeland is also contemplating a wealth tax on individuals.

“Both of those would be on brand for the current government,” said Bank of Montreal senior economist Robert Kavcic in a report Friday.

Higher corporate taxes on specific sectors – the grocery stores, telecoms and energy producers that consumers love to hate – would be consistent with last year’s increase in levies on banks and insurers.

The extra revenue would help Ms. Freeland deliver on her promise to keep this year’s deficit below $40-billion and bring down debt as a percentage of the overall economy. In 2023, the Finance Department forecast that higher taxes on financial institutions would bring in an extra $2.25-billion over five years.

You don’t need to be an economist to realize that punishing one industry, while favouring others, is bad public policy. That is, however, what economists say. “Picking specific sectors, perhaps those that just happen to be making more money in the last year, goes against the grain of having a tax system that doesn’t arbitrarily tilt capital flows,” Mr. Shenfeld said.

Raising corporate taxes also makes it harder for Ms. Freeland to solve one of the government’s most vexing long-term challenges: the steady decline in Canadian productivity.

To increase prosperity – to boost the wages of workers who elect governments – Ms. Freeland needs to get CEOs to invest more money in their businesses. Higher taxes achieve the opposite. Mr. Shenfeld said: “Taxes on profits will, unless passed on to consumers in higher prices, serve as a disincentive for the capital spending.”

The potential of companies to pass along at least a portion of any tax hikes to their customers would feed the inflation dragon the Finance Minister has spent the past two years trying to slay. “Higher taxes will be passed on in part to consumers, and that can only fuel inflation and have a negative impact on affordability,” said Robert Asselin, a former budget director of the Finance Department and now a senior vice-president at the Business Council of Canada.

Raising taxes on the wealthy – again – is equally problematic.

Canada already has one of the highest top statutory personal income tax rates in the OECD, at 53.5 per cent. Boosting this burden is more likely to fuel flight than fill government coffers. When France opted for a so-called “supertax” on its richest citizens in 2012, its soccer players threatened to go on strike and numerous luminaries, including actor Gérard Depardieu, quit the country. The tax brought in far less revenue than expected and was scrapped within two years.

France also dropped a four-decade flirtation with wealth taxes in 2017 after the measures brought in minimal revenues while prompting an estimated 10,000 citizens to depart. Most simply relocated to next-door neighbour Belgium.

New taxes can’t be at the top of the list as Ms. Freeland tries to balance the country’s financial health with her government’s ambitions, including winning the next election. Economists recommend the government look to common sense measures – spending cuts, slowing new program launches – in the coming budget. Mr. Shenfeld said the Finance Minister should “only opt for new taxes as a last resort, and in a way that avoids barriers to much-needed productivity gains.”