Fraser Forum

Obstacles to business investment in Ontario—uncompetitive tax rates

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A recent study from the Fraser Institute highlights a substantial problem for Ontario’s economy—the fact that business investment to the province remains weak. In fact, business investment still hasn’t recovered to pre-recession levels.

After more than a decade of anemic economic growth, the province has finally seen growth tick back up over the past year, thanks largely to a booming housing market in Toronto. For a province that has suffered so much economic pain, an uptick in growth is certainly good news—but weak business investment raises concerns about the province’s prospects for sustainable growth over the long term.

But why is business investment to Ontario so weak?

The study identifies a number of factors that contribute to the high cost of doing business in Ontario, which likely discourage investment, including the province’s high tax rates in key categories. Specifically, the study draws attention to Ontario’s uncompetitive personal income tax system.

Income tax rates can influence the decision-making of business owners when deciding where to set up shop or expand. Businesses that employ high-skilled labour will find it more difficult to attract employees if marginal tax rates are high—as those workers will likely chose work in a jurisdiction where they get to keep more of their earnings. This is especially true in sectors where employees are in high demand and have high mobility (i.e. they are most likely to move for a job).

And Ontario’s personal income tax rate is simply not competitive with a number of nearby jurisdictions. In fact, Ontario’s top marginal personal income tax rate (the combination of federal and provincial income tax) is 53.5 per cent. That’s the second highest marginal rate of any Canadian province or American state. Just across the Detroit River in neighbouring Michigan, companies can benefit from a top marginal personal income tax rate almost 10 percentage points lower.

Not only is Ontario’s top income tax rate uncompetitive, but the way the provincial government’s management of public finances in recent years  gives businesses little hope for significant tax relief any time soon. Ontario’s debt is currently the third highest in Canada at almost 40 per cent of its GDP—and is largely the result of increased government spending. What’s more, the province continues to add almost $10 billion in new debt every year. As long as the province is still piling up debt and raising the cost of servicing its debt, it will be more difficult for its provincial government to consider meaningful tax relief.

Increasing business investment to the province would benefit the province’s medium- and long-term economic growth prospects. But at present, there are numerous factors driving up the cost of doing business in Ontario and therefore making it more difficult for the province to attract this badly needed investment.


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