tax competitiveness

Election results could spell trouble for B.C.’s tax competitiveness

The NDP and Green Party both want to raise B.C.’s top personal tax rate.

Carbon tax exacerbates harm from other tax hikes in Alberta

In 2015, the Notley government scrapped the single-rate personal income tax.

Trump’s tax plan and the impetus for corporate tax cuts in Canada

A one percentage point drop in the combined corporate tax rate would increase the average wage of Canadian workers by up to $390.
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Economic research indicates that tax rates affect people’s behaviour, with higher taxes contributing to lower rates of economic growth, personal income growth, capital formation, and entrepreneurship. Research on taxation also finds that different taxes impose different costs on the economy. Specifically, production or capital-based taxes impose much higher costs on an economy than do less costly taxes such as consumption taxes. Unlike the consumption-based Harmonized Sales Tax (HST), the Provincial Sales Tax (PST) is partly a consumption tax and partly a tax on production. Restoring the PST has therefore increased the cost of investing in British Columbia and undermined the province’s economic competitiveness.

Primarily due to the re-implementation of the PST, BC’s tax system poses a challenge for the province in terms of attracting investment and facilitating economic growth. Without a more competitive system, BC risks losing entrepreneurs and investment that may gravitate elsewhere. Inaction ultimately means fewer opportunities and less prosperity for British Columbians.

This submission examines BC’s performance relative to other provinces in three key areas of taxation (business taxes, property taxes, and personal income taxes) and provides reform options for each area.

To mitigate the negative effect on the provincial investment climate of restoring the PST, BC could:

  • Introduce a complete sales tax exemption on all business inputs including machinery and equipment. Because sales taxes on capital goods are economically damaging taxes, this is a high priority reform option.
  • Reduce the general corporate income tax rate to 8% from its current 11% rate, encouraging business investment and giving BC a marked advantage over other provinces.

Another important business tax reform is to reduce the disincentive for small businesses to grow. A less ideal but still practical option is to increase the threshold of income eligible for the preferential small business tax rate of 2.5% from $500,000 to $1 million.

When it comes to property taxes, BC appears to have a serious problem in its treatment of certain business classes as municipalities subsidize low residential rates with relatively high rates on business property. Two options could rectify this problem:

  • Equalize property tax rates across business classes.
  • Determine ranges of fairness and thresholds based on average property tax rates in municipalities for different major classes and require all tax rate changes to move toward this range.

To attract and retain highly skilled workers, BC could make the province’s middle and top marginal income tax rates more competitive. Specifically, BC could gradually collapse its top three marginal rates (14.7%, 12.3%, and 10.5%) with the ultimate goal of moving toward a single tax rate on personal income.

Tax policy at odds with government rhetoric on Canada becoming a ‘knowledge-based’ economy

In Ontario, the top combined federal-provincial personal income tax rate is now 53.5 per cent.

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Canada's Rising Personal Tax Rates and Falling Tax Competitiveness

In December 2015, Canada’s new Liberal government introduced changes to Canada’s personal income-tax system. Among the changes for the 2016 tax year, the federal government added a new income-tax bracket, raising the top tax rate from 29% to 33% on incomes over $200,000. This increase in the federal tax rate is layered on top of numerous recent provincial increases. Starting with Nova Scotia in 2010, at least one Canadian government has introduced one (or more) new personal income-tax brackets with higher tax rates in every year except 2011. Over this period, seven out of 10 governments in-creased tax rates on upper-income earners. As a result, the combined federal and provincial top personal income-tax rate has increased in every province since 2009.

The largest tax hike has been in Alberta, where the combined top rate increased by 23.1%, in part because the new rates were added to a relatively low initial rate. Alberta has traditionally had Canada’s most competitive top tax rate but now has a higher combined top tax rate than neighbouring British Columbia. In Ontario, the combined top rate increased by 15.3%; in Quebec it increased by 10.6%.

These increases have important consequences for Canada’s economy. In particular, high and increasing marginal tax rates—that is, the tax rate on the next dollar earned—discourage people from engaging in productive economic activity, ultimately hindering economic growth and prosperity. This occurs because marginal tax rates reduce the reward of earning more income and, in the case of personal income taxes, more labour income. There is general agreement in the economic literature on this point; the debate is about the magnitude of the effect.

The federal and provincial increases to Canada’s marginal income-tax rates from 2009 to 2016 have put the country at a greater competitive disadvantage for attracting and retaining skilled labour and, less directly, investment and entrepreneurs. Even before the changes, the country’s combined federal and provincial top marginal tax rates compared unfavourably to those in the United States and other industrialized countries.

Out of 61 Canadian and US jurisdictions (including the provinces, states, and Washington, DC), Nova Scotia currently has the highest combined top statutory marginal rate (54.00%), followed by Ontario (53.53%), and Quebec (53.31%). Six Canadian provinces occupy the list of 10 jurisdictions with the highest top combined marginal income-tax rates and all provinces are in the top 20. There are a total of 42 US jurisdictions with combined top tax rates that are lower than all Canadian provinces.

The fact that Canada’s top tax rates are often applied to lower levels of income than is the case in other countries further erodes our tax competitiveness. To adjust for differences in income thresholds, we compare the combined statutory marginal tax rates at various income levels in Canadian dollars for each Canadian and US jurisdiction. At an income of CA$300,000, the highest threshold in which a Canadian combined top rate is applied, Canadians in every province face a higher marginal income-tax rate than Americans in any US state. Results are similar at an income of CA$150,000 and Canada’s marginal tax rates are also uncompetitive at incomes of CA$75,000 and CA$50,000.

Taken together, Canada’s personal income-tax rates are decidedly uncompetitive compared to those in the United States. And, Canada also competes with other industrialized countries for highly skilled workers and investment. To measure the competitiveness of Canada’s top tax rates, the study compares the combined top statutory marginal income-tax rates with rates in 34 industrialized countries. In 2014 (latest year of available international data) Canada had the 13th-highest combined top tax rate out of 34 countries. The federal change to the top rate in 2016 has markedly worsened Canada’s competitive position. The new 2016 Canadian top tax rate (53.53%) is sixth highest relative to the 2014 international rates.

Canadian governments have put the country in this uncompetitive position, in part, to raise more revenue as they grapple with persistent deficits and mounting debt. However, the tax increases are unlikely to raise as much revenue as governments expect since taxpayers—particularly upper-income earners—tend to change their behaviour in response to higher tax rates in ways that reduce the amount of tax they might pay. Federal and provincial governments would do well to consider reversing the trend towards higher marginal tax rates on upper-income earners, and lower personal income-tax rates.

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