Canada has one of the lowest productivity levels among G7 countries. Analysts point to labor market dynamics, taxes, and poor policymaking by the government. In this article, I will highlight the impact of high taxes on our productivity as a country.
Canada is generally uncompetitive compared to other OECD countries in terms of business, capital gains, and personal income taxes. The Canadian government’s reliance on a myriad of taxes, burdens society and shifts talent and economic promise away. In a country where the majority of the population relies on public services such as public healthcare, roads, and education, it is important for the government to fund programs through the collection of taxes. However, the balancing act is to avoid deterrence of business activity through imposition of high taxes, and/or raise deficits to exorbitant levels (the federal deficit is projected to be $39.8 billion in 2024-2025, and $38.9 billion in 2025-2026). At this, the current federal government has failed:
- Canada’s corporate tax rates were once below OECD average, but now rank higher than many peers that include Sweden, Norway, and the USA (Bazel and Mintz 2020).
- The USA and other OECD countries implemented tax reforms over the past 5 years, contrary to Canada, which exacerbates Canada’s tax burden compared to its competitors. This will lead Canadian companies to invest less domestically and explore tax efficient investments and structures abroad, negatively impacting productivity growth.
- Higher tax rates discourage entrepreneurship and inception of small businesses, which further dampens productivity growth (Djankov et al, 2008).
- Canada’s poor labor productivity is linked to high business taxes and an environment that is incongruent to capital investment.
- Canada’s 2024 federal budget increases the capital gains tax liability, further exacerbating the country’s low productivity problem. Here’s an example video I created on how the new capital gains tax may impact you: Capital Gains Tax Analysis by Shaheryar Mian
- Canada’s personal income tax hikes from 29% to 33% under the Trudeau government in 2015 have made it a less competitive country for talented workers who may find neighboring USA a better destination to grow their personal income and excel in their careers. The brain drain as a result has caused Canada to lose approximately 7% of its workforce to the US alone per annum (Randstad).
In sum, Canada’s high tax burden serves as a major impediment to productivity growth in the country, making it one of the least productive countries in the OECD. Canada’s high immigration failed to tip the scale of productivity. Coupled with the country’s housing shortage, this creates a challenging environment for newcomers. It is therefore fundamentally important for Canada to undertake tax reforms to make the country a friendlier environment for business, and to retain talent and increase its productivity levels. The need to fund Canada’s public services can be addressed not only through taxes and deficit spending but also by utilizing the country’s abundant natural resources.
Published by: Shaheryar Mian on August 6th, 2024
References: Bank of Canada, CTV News, Tax Foundation, StatsCan, Globe and Mail ,and Fraser Institute. Please note that this briefing contains paraphrased summaries and attributes the original content to the news sources. Readers are encouraged to visit the links to access the full article in its original form for a thorough and complete view. You may need to subscribe to the news agency and source for access. Photo Credit: (Shaheryar Mian). This blog entry aggregates news and research articles and may contain thoughts and summaries by the author that may be inaccurate, or out of date.