Tax reform will increase possibility of four-day workweek in Canada

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Appeared in the Ottawa Sun, February 17, 2021
Tax reform will increase possibility of four-day workweek in Canada

The idea of a four-day workweek has gained significant traction in Canada. According to an Angus Reid poll, the majority of Canadians surveyed last June agreed it would benefit the country to shorten the workweek in a post-COVID world. Since then, however, there’s been little discussion about how to accomplish this feat.

Clearly, a four-day work week could raise the standard of living for Canadian workers by allowing them to enjoy more leisure time while maintaining or even increasing their compensation. But as noted in our new analysis published by the Fraser Institute, for this to happen, we Canadians must significantly improve our output per hour worked—or in other words, be more productive.

Which raises the obvious question. How can we become more productive?

For starters, tax reform remains one of the best ways to help increase overall productivity. Taxes can alter the behaviour of individuals and businesses. Indeed, high taxes discourage savings, investment, entrepreneurship and innovation. Currently, Canada ranks among the highest tax jurisdictions in the industrialized world for taxes on personal income, businesses and capital.

Due to our high marginal income tax rates place, Canada faces a competitive disadvantage in attracting and retaining high-skilled workers and entrepreneurs—the people who drive innovation and job creation. Moreover, high taxes on personal income create economic disincentives by lowering the after-tax financial reward for Canadians when they work an extra hour, invest in their education, or save and invest their money.

Canada’s uncompetitive business tax rates also create an economic environment that penalizes, rather than promotes, capital investment. Among OECD countries, Canada had the 10th highest business tax rate (2019) at 26.2 per cent—higher than countries such as the United States, Sweden and Denmark. This relatively high business tax rate discourages the investment necessary for advancements in labour productivity growth.

Finally, on capital gains taxes, Canada also performs poorly, which a capital gains tax rate higher than the average among OECD countries. The capital gains tax is one of the most damaging forms of taxation for the Canadian economy because it diminishes the reward entrepreneurs and investors can expect to receive from engaging in risk-taking activities such as creating new products, services and technologies. Discouraging such undertakings hurts the productivity growth necessary for a shorter workweek.

Clearly, reducing taxes on personal income, businesses and capital gains would represent an important first step towards a four-day work week by increasing our productivity. Canada would become a more attractive destination for educated immigrants in the STEM (science, technology, engineering and math) fields and enable our shift towards a more dynamic knowledge-based economy.

A four-day work week is only feasible for Canadians if we pursue policy reforms that make our economy more conducive to investment, innovation and entrepreneurship. Uncompetitive taxes on personal income, businesses and capital gains hinder our ability to achieve this worthwhile objective. Simply put, Canadian governments must reduce these taxes if we wish to shorten our workweek while maintaining the same levels of income compensation for Canadian workers.

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