Canada’s tax rates significantly higher than U.S.: Fraser Institute

Report says taxes discourage people from engaging in productive economic activity, hindering economic growth

A new report by Canadian public policy think-tank the Fraser Institute says Canadian workers across the income spectrum pay significantly higher personal income taxes than their American counterparts.

“Income taxes are a major attractant — or deterrent —for entrepreneurs, businesses and workers looking to start a business, expand operations or relocate, and at virtually every level of income, Canada’s tax rates are uncompetitive with the U.S.,” said Robert P. Murphy, Fraser Institute senior fellow and co-author of Canada’s Rising Personal Tax Rates and Falling Tax Competitiveness.

The report said the Trudeau government introduced changes in December 2015 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 per cent on incomes over $200,000. This increase in the federal tax rate is layered on top of numerous recent provincial increases, it said.

“Starting with Nova Scotia in 2010, through 2018 at least one Canadian government has increased the top personal income tax rate in every year except 2011. Over this period, seven out of 10 governments increased 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,” said the report.

“The largest tax hike has been in Alberta, where the combined top rate increased by nine percentage points (or 23.1 per cent), in part because the new rates were added to a relatively low initial rate. In Ontario, the combined top rate increased by 7.1 percentage points (or 15.3 per cent); in Quebec it increased by 5.1 percentage points (or 10.6 per cent).

“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.”

“Competitive personal income tax rates are key to a strong growing economy, and other things being equal, higher personal income taxes deter entrepreneurs, workers, and businesses,” said Murphy. “Policy-makers in Canada should evaluate personal income tax rates in Canada with an eye to tax rates paid in neighbouring and competing jurisdictions.”

Mario Toneguzzi is a Troy Media business reporter based in Calgary. He writes for Calgary’s Business.

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