NCPA - National Center for Policy Analysis

A TAX PLAN FOR CANADA'S PRODUCTIVITY WOES

April 7, 2006

A study released by the Fraser Institute recommends a five-year, $60 billion plan for federal and provincial business tax relief to spur investment and improve Canada's productivity.

According to the researchers, Canada has one of the highest tax rates on incremental investment in the world, which discourages the investment critical to improving productivity.

The tax cuts the researchers suggest include:

  • Reducing the federal corporate income tax rate to 12 percent from 21 percent ($28.8 billion in federal tax relief).
  • Reducing provincial corporate income tax rates by 30 percent ($18.3 billion in provincial tax relief).
  • Eliminating entirely corporate capital taxes at both levels of government ($12.0 billion in tax relief).
  • Harmonizing provincial sales taxes with the general sales tax (GST) or implement provincial-specific programs that completely exclude business inputs from sales taxes.

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

A variety of measures all point to the fact that Canada's productivity is struggling, explain the researchers:

  • Canada ranks 18th among 24 industrialized countries for average labor productivity growth over the past ten years.
  • Gross domestic product (GDP) per person has declined from 87.9 percent of that in the United States in 1985 to 84.7 percent in 2004.
  • Average after-tax income per person has decreased from 80.4 percent of that in the United States in 1985 to 66.9 percent in 2004.

If productivity continues to lag, many of Canada's most cherished social programs will face serious financial pressure in the future. By implementing their recommendations, Canada would be in the upper echelons for investment and development among industrialized countries, say the researchers.

Source: Niels Veldhuis and Jason Clemens, "A Tax Plan for Canada's Productivity Woes," Fraser Forum, February 2006.

 

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