Why we need reform to support entrepreneurship in Canada
The ability to increase living standards primarily comes down to one thing: being more productive. Individuals and societies collectively can only improve their living standards if they become better (i.e. more efficient) at transforming inputs such as labour and raw materials into desired outputs. Entrepreneurship is essential to this process, as it’s about discovering new and better ways to produce existing goods and services, as well as introducing entirely new products.
The importance of entrepreneurship to improving living standards is just one reason why Canadians should be concerned about the decline in entrepreneurship, as measured by business startups. The rate of small business startups in Canada has declined by almost 13 per cent since the early 2000s.
This decrease in entrepreneurship has coincided with a steep decline in our ability to transform inputs into desired outputs more efficiently, as measured by total factor productivity growth. Specifically, productivity growth has declined by a little more than 50 per cent between the late-1990s and early-2010s.
While there are no doubt Canadian-specific reasons for the decline in entrepreneurship—high marginal personal income tax rates and comparatively high capital gains taxes, for instance—there’s also something larger going on beyond Canada.
Other industrialized countries are also experiencing declines in entrepreneurship, and declines in productivity growth. For example, over the same period discussed above, entrepreneurship declined by 17.0 per cent in the United States and 28.5 per cent in Australia. The two countries also experienced declines in the growth rate of productivity of 81.2 per cent and 53.3 per cent, respectively.
One of the key explanations for this pan-industrialized country phenomenon is that all of these countries are experiencing an aging of their populations. As populations age, the share of the population best positioned to be successful entrepreneurs, namely individuals in their late-20s through to their early-40s, declines. People in this age group drive entrepreneurship because they’re willing to take entrepreneurial risks, such as starting a business, while often possessing business experience.
Consider that the share of Canadians between the ages of 30 and 39 has already declined 16.6 per cent since the 1980s, and is expected to decline by another 11.4 per cent by the 2040s.
There’s very little, if anything, governments can do to reverse the aging of their populations. However, a number of policies can be reformed to strengthen incentives for entrepreneurship and improve the environment within which entrepreneurs operate, thereby increasing both the number and quality of entrepreneurs.
A recent set of essays by leading researchers in North America and Europe assessed different policy reforms that could improve entrepreneurship, ranging from tax reductions to regulatory reform to changes in banking and financial regulations. Particular reforms may be more applicable to certain countries than to others.
For instance, there’s no doubt Canada’s comparatively high personal income tax rates on entrepreneurs, professionals, skilled labour and business owners are impeding entrepreneurship. Moreover, Canada’s relatively high taxes on capital gains also discourage risk-taking and reduces access to financing for starting and growing entrepreneurial businesses.
Noted economists Deirdre McCloskey and Art Carden also raise the issue of how societies value entrepreneurship. This is particularly important in Canada given the recent anti-business rhetoric and attempted overhaul of taxation for entrepreneurs, which inevitably sends a chilling signal to potential entrepreneurs.
Entrepreneurship is vital to our ability to improve our living standards, and demographics are having an adverse effect on entrepreneurship. Canada must reform policies such as taxes, regulations and access to financing, to name a few, to strengthen entrepreneurial incentives and improve the environment for entrepreneurs. Otherwise, we risk continued declines in entrepreneurship, productivity and ultimately our standard of living.