Achieving the Four-Day Work Week: Part 4 Essays

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Increasing Productivity Through Tax Reform

The structure and rates of taxation are important in any discussion of productivity in Canada because the various types of taxes, as well as tax rates, affect economic behavior in different ways. Three prominent types of taxes in Canada are business taxes, capital taxes, and personal income taxes, and each of these is related to productivity.

Taxation efficiency levels are important for productivity because taxes impose economic costs by altering the behaviour of individuals and businesses. For instance, personal income taxes reduce after-tax wages, thereby affecting how much people are willing to work. Similarly, taxes on businesses increase the prices of goods, services, and business inputs, which can distort efficient production decisions. By changing the incentives and resulting behaviour of individuals and businesses, taxes can have adverse effects on private sector productivity by reducing savings, investment, the supply of labour, entrepreneurship, and innovation.

To be sure, some taxes impose greater economic costs on society than others. The cost of various types of taxes can be quantified by using a mechanism known as marginal efficiency cost (MEC). Specifically, the MEC of taxes calculates the efficiency cost of raising one additional dollar of revenue from a particular tax. A number of studies on MECs demonstrate that due to their incentive effects, taxes on corporate income (CIT) and personal income (PIT) are much less efficient and impose higher costs on society than consumption and payroll. Further, research has shown taxes on capital (i.e., capital gains taxes) to be among the most economically damaging and least efficient types of taxation.

These insights suggest that it is beneficial for Canada to rely less than it currently does on costlier taxes such as capital gains, CIT, and PIT. In fact, moving away from the most damaging types of taxes is an efficient way to improve economic and productivity growth.


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