Entrepreneurship, Demographics and Capital Gains Tax Reform

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Entrepreneurship, Demographics, and Capital Gains Tax Reform

Business start-ups, and entrepreneurship more generally, drive productivity and economic growth. But the rate of business start-ups in Canada is declining. Since it peaked in 2004, the rate of business start-ups as a share of existing firms has declined by 16.2%.

The rate of decline in business start-ups increases as the size of the firm (measured by employment) increases. Over the last decade, from 2003 to 2012, the rate of business start-ups for firms with 5 to 20 employees declined 41.3%, compared to a drop of 8.0% for firms of all sizes over the same period.

There is increasing evidence of a relationship between entrepreneurship and age. Specifically, younger people are less risk averse than older people and are more prone to question the status quo. These characteristics are key to the entrepreneurial process. Like all industrialized countries, Canada’s population is aging; a greater and greater share of the population is over age 65. Statistics Canada expects the portion of those over age 65 as a share of the population to increase by 74.1% between 2008 and 2035.

Can governments use policy levers to influence entrepreneurship so as to mitigate these demographic effects? This essay focuses on the benefits of capital gains tax relief since it both improves the incentives for entrepreneurs and assists those financing business start-ups. Currently, Canada has the 14th highest capital gains tax rate. Canada has an opportunity to supercharge its entrepreneurial environment by reducing the capital gains tax rate, creating a rollover as has been done in the United States, or simply eliminating the capital gains tax, as has been done in many OECD countries.

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