Planned federal tax hikes could cripple growth

Tax reform proposals will discourage the kind of investment and risk-taking needed to expand Canada’s economy

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By Jason Clemens
and Niels Veldhuis
The Fraser Institute

Finance Minister Bill Morneau recently made an extraordinary statement that unfortunately encapsulates the federal government’s approach to economic policy.

Explaining the government’s proposed changes to small business taxation to CTV, Morneau used the phrase “going after” to describe the approach to extract more taxes from incorporated “professionals and wealthy people.”

It’s shocking that a finance minister would use this kind of language to describe tax reform. The minister is obviously unaware of the signals he’s sending to high-skilled workers, entrepreneurs, investors and professionals such as lawyers, doctors and dentists.

Jason Clemens

To achieve a strong economy, we need professionals and entrepreneurs to invest in their businesses, and take risks to expand their businesses so they can supply the goods and services demanded by Canadians. In doing so, they strengthen the economy and improve the lives of Canadians.

Investment by private businesses in plants, machinery and equipment is down more than 15 per cent since 2014, so Canada must do everything it can to welcome and encourage these people.

And yet despite running on and continuing to laud the importance of improving the economy, the Liberals continue to enact policies and send signals that discourage economic growth.

For example, one of the first policies enacted by the government after it took power in 2015 was to increase the top federal income tax rate to 33 per cent from 29 per cent. This came after most provinces also raised their top rates, which means in every province the top personal income tax rate is now close to or even over 50 per cent.

The government has also increased capital gains taxes, which entrepreneurs are particularly sensitive to, and refused to clarify whether additional increases to capital gains and new taxes for stock options are in the works.

Niels Veldhuis

The government seemingly doesn’t understand that higher tax rates discourage Canadians from the productive activities that benefit us all. Telling professionals and skilled labour that more than half of their earnings (from new endeavours, expanding their business or simply working more) will go to the government means we don’t value these activities because we’re discouraging them.

But it wasn’t always this way. Former Liberal Prime Minister Paul Martin understood. “Lower personal taxes would also provide greater rewards and incentives for middle- and high-income Canadians to work, save and invest,” he said.

And former Conservative prime minister Stephen Harper once said: “Canada needs lower personal income tax rates to encourage more Canadians to realize their full potential.”

Like tax increases, the Liberal carbon price mandate (taxes and regulations) will also dampen economic performance. It will increase costs for firms, particularly in carbon-intensive industries such as agriculture, manufacturing and resources. These firms are being encouraged to move production from jurisdictions with carbon taxes (like Canada) to those without. That would further damage the Canadian economy without providing any environmental benefit.

This is all the more devastating now that it’s clear the United States will not introduce a national carbon tax.

Why isn’t the government getting the message? Perhaps because it’s ardent in its position, despite the evidence and feedback. The finance minister said as much during his CTV interview: “We’re on a plan here … we’re going to move forward … we said we were going to do this.”

This response comes in the middle of the government’s consultation period. So what’s the point of consulting when you’ve made up your mind?

Hopefully the Liberals will come to learn what they once knew: creating the right environment where businesses, investors, workers and entrepreneurs can flourish is the proven approach to a better, more prosperous economy.

Jason Clemens and Niels Veldhuis are economists with the Fraser Institute.


tax hikes, business taxes canada, cripple growth

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