Tax relief can increase Canadian productivity

February 8, 2006

Free Market Foundation

Canada needs C$60 billion in federal and provincial business tax relief over the next five years to spur investment and improve the country’s productivity, says the Fraser Institute.

Indeed, Canada has one of the highest tax rates on incremental investment in the world, which discourages the investment critical to improving productivity. Canada’s productivity is struggling, says Fraser:

Canada ranks 18th among 24 industrialised countries for average labour productivity growth over the past 10 years.

Gross domestic product (GDP) per person has declined from 87.9 per cent of that in the United States in 1985 to 84.7 per cent in 2004.

Average after-tax income per person has decreased from 80.4 per cent of that in the United States in 1985 to 66.9 per cent in 2004.

Fraser recommends:

Reducing the federal corporate income tax rate to 12 per cent from 21 per cent (C$28.8 billion in federal tax relief).

Reducing provincial corporate income tax rates by 30 per cent (C$18.3 billion in provincial tax relief).

Eliminating corporate capital taxes in their entirety at both levels of government (C$12.0 billion in tax relief).

Harmonizing provincial sales taxes with the Goods and Services Tax (GST) or implementing provincial-specific programmes that completely exclude business inputs from sales taxes.

Canada can reduce the cost of the C$60 billion tax cuts if jurisdictions broaden their tax bases, eliminate tax incentives that favour one type of investment over another, and control spending.

Niels Veldhuis, co-author of the study, says that if productivity continues to lag, many of Canadas most cherished social programmes will face serious financial pressure in the future. By implementing tax relief, Canada would be in the upper echelons for investment and development among industrialised countries.

Source: Jason Clemens, New Study Recommends $60 Billion in Federal and Provincial Tax Relief to Spark Canada’s Productivity, Fraser Institute, January 12, 2006.

For text: http://www.fraserinstitute.ca/shared/readmore.asp?sNav=nr&id=706

For more International: http://www.ncpa.org/pi/internat/intdex1.html

FMF Policy Bulletin/ 31 January 2006