High taxes mean Canada can’t compete, says Fraser Institute

High personal tax rates and the relatively low incomes to which they apply are hurting Canada’s economic competitiveness, finds a study by the Fraser Institute.

“Thanks to federal tax reforms in 1990s and the early 2000s, Canada’s business and investment taxes are competitive with its peer [G7] countries. But when it comes to combined federal and provincial personal tax rates, Canada falls behind,” says Sean Speer, Fraser Institute associate director of fiscal studies.

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The study looks at Canada’s total federal and provincial income tax rates—which, at the top rate in 2012, ranged from 39% in Alberta to 48.22% in Quebec—and the fact that Canadian tax rates apply at income levels that are low compared to other countries.

With those factors, Canada’s personal income tax competitiveness is in the middle, compared to G7 countries, and compared to the United States, Canada fares poorly.

At an income level of $132,406 (the income level at which Canada’s top federal tax rate applies) every province’s combined provincial and federal marginal tax rate is higher than American combined federal and state tax rates.

“Because of Canada’s close proximity to the United States, the disparity in total income tax rates puts Canadian provinces at a real disadvantage,” Speer says.

“If Canada wants to encourage investment, business development, entrepreneurship and work effort, we need to lower marginal tax rates and increase the income thresholds at which they apply.”

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The study’s authors, Jason Clemens, Niels Veldhuis, and Robert P. Murphy, also examined the economic effects of high marginal tax rates.

They found relatively high marginal tax rates negatively influence an individual’s investment, savings, labour supply and income reporting behaviours.

A study of the tax structures in 23 OECD countries found that a 10% increase in marginal tax rates decreases a country’s annual rate of economic growth by 0.23%.

With the October throne speech expected to signal Ottawa’s intentions for the 2014 budget, the authors recommend that all governments in Canada turn their attention to reducing tax rates once budgets are balanced.

Staff

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