Planning for the effects of government debt

[scottish]

I've been growing dismayed by the ongoing deficits in the Canadian federal, provincial and municipal governments.   I had some hopes that the new federal government would stop with the deficit budgets.   But they didn't.

It's difficult to get accurate figures on this topic.   Numbers I have seen show that the net government debt is on the order of 37,400 CAD for every Canadian citizen.   We are paying over 60B CAD in interest every year, and this is going to go up as interest rates increase.   Net government debt  is gross government debt minus the government's financial assets.   So the debt is actually much worse than 37,400CAD per capita.    (Here's a reference from a right wing think tank:  https://www.fraserinstitute.org/studies/cost-of-government-debt-in-canada-2017 )   Wikipedia also has a page discussing this.  https://en.wikipedia.org/wiki/Canadian_public_debt

The only recent example of a national government getting into trouble with this was Greece.   Government debt during the crisis was on the order of 30,000 euros per capita.   Our economy is in better shape than the Greek economy was, but those debt levels are not a lot more than Canadian government debt levels.    Greece went through a difficult austerity cycle.   Greece is different from Canada in that they are locked into the Eurodollar, while we control our own currency.   

It seems that most of the developed countries have a similar debt problem.   Some are a bit better, some are a bit worse.   I'm at the point where I'm accepting this situation as it is and I'm wondering the best way to protect our personal finances from government debt related problems. 

The first step is to have an internationally diversified portfolio.   If one country gets into problems, hopefully the others won't.   At least not at the same time.    This reminds me a bit of the supposedly uncorrelated CDOs during the great recession, but I can't think of anything else to do on this front.

When the Canadian government needs more money to deal with the debt, it has to get it from somewhere.    There are only so many options:
1.  consumption taxes similar to the GST (VAT in England).
2.  income tax
3.  wealth tax
4.  currency devaluation

#1 is no problem for us.   We're not exactly high on the consumption ladder anyway.
#2 isn't really a problem.   We're pretty well FI, so taxing our income doesn't do much one way or the other.   When I stop working our income will go way down & so will our income tax.
#3 is potentially a big problem.    Canada is already seeing wealth taxes in British Columbia (punitive taxes on vacation homes in particular).   I'm relying on the fact that this would hit the really wealthy people - the ones who bankroll the politicians.
#4 is addressed by international diversification.

So, my question:    Is that it?    What have I missed?     Is there any (legal) way to shelter our assets from a wealth tax?

[Prairie Stash]

#4 is an opportunity. If you have currency in other countries, like USD, and you spend it in countries with low value currency, your dollars end up going farther. Witness the return the US index had when the canadian  dollar was also fluctuating.

#3 could happen in the form of increasing the tax on capital gains exemption from 50% to 75% then 100%. It hasn't always been 50%, so I've been told. 

[maizefolk]

If you control your own currency and run into trouble with servicing your debt load, numbers 1-3 all require political willpower to put into place. In the absence of strong political willpower I think #4 tends to happen by default (if you'll pardon the pun), so it's the one I tend to worry about the most. Mostly what I do on that front is avoid having too much of my net worth in bonds or other fixed-income dollar denominated assets, and make sure I'm not paying down my long term, fixed rate, uncallable debt (30 year mortgage) too fast.

For #3, does Canada has a precedent for taxing world-wide assets, or are you folks on a territorial system? If you're territorial, it might be a lot harder to push through a wealth tax which would apply to assets owned by Canadian citizens but held overseas than for them to institute a tax on assets held in Canada. For example it sounds like the BC taxes are specifically going after housing. So I could see holding some of your assets in an overseas brokerage account as a potential hedge. Although it might be one which is more trouble to institute than it's worth.

[scottish]

Canada's fairly good at tracking down assets world wide.   The CRA (Canada revenue agency) has recently been tracking down tax evaders using corporations in the Isle of Man for example.

I really like your point about political willpower.    That provides an excellent perspective.   There's probably more to worry about a populist government trying to remove income inequality than a wealth tax.

As an example, the BC wealth taxes were introduced to punish the wealthy who have second homes/business suites in HCOLA  parts of BC.   The thinking is that these homes could be used for the locals instead.   Much of the lower mainland is upset because of the high real estate prices in Vancouver, so the local governments are all trying to do something to assuage this feeling.   Whether their actions will actually improve accessibility to real estate remains to be seen.  Not to mention the reactions of all the existing property owners when they see their net worth dwindling as real estate prices fall.

Prairie Stash, capital gains are a form of income... so I've been including capital gains taxation increases into item #2.

[Prairie Stash]

Prairie Stash, capital gains are a form of income... so I've been including capital gains taxation increases into item #2.

That's fair. I'll clarify why I think of it as a wealth tax. With the start of the TFSA in 2009 a lot of low to medium income people will soon stop having taxable gains at all, between TFSA and RRSP it takes a fair chunk of income to have taxable accounts. It would be fairly easy to increase a tax on wealth, via a capital gains taxation increase. Since poor to middle income don't pay capital gains, I consider it more of a tax on people of wealth. I can see it as income as well, but I think we can both agree it affects wealthy individuals the most.

A wealth tax could be a flat tax on net worth, is that what you were trying to get at? That would be hugely unpopular in the west if it includes farmland, the farming and agricultural sectors would be hit hard. Any government that imposes it would be blocked out of Alberta, Saskatchewan and Manitoba for a couple generations; we still see remanants of voter angst over the NEP. I don't see it as a potential tax primarily due to the divisiveness it would cause; East vs. West. It would be far simpler to tack on a couple points to the consumption tax before committing political suicide. Many of the provincial governments have their own PST (HST) increases and have lived to see another day.

[scottish]

Yep, that's true.  Increased capital gains tax would mostly affect wealthy people.    At least we have some control over the amount of capital gains each year (aside from capital distributions, if we don't sell there aren't any gains).

Great point about farms in western Canada, thanks for that.