Big 3 political parties reach tax and incentives consensus

Tax rates really do matter when people are deciding where to invest, and live

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By Jason Clemens
and Niels Veldhuis
The Fraser Institute

VANCOUVER, BC Sep 9, 2015/ Troy Media/ – A profound, if partial, consensus on taxes and economic incentives reached amongst the main political parties in Canada seems to have been almost completely ignored. The consequences for policy are remarkable if this consensus is properly understood and broadly applied.

The exchanges between Prime Minister Stephen Harper, Opposition leader Thomas Mulcair, and the leader of the third party, Justin Trudeau, suggest an acceptance of the basic idea that tax rates matter because they influence decisions on whether to invest, start a business, work hard, and even where to locate. Such formal recognition of this link between tax rates, which affect the pay-offs to these endeavours, and the decision to undertake such endeavours is profound.

Liberal Leader Trudeau challenged Mulcair and his party’s plan to increase the corporate income tax rate because he correctly explained how such an increase would adversely affect business investment and job creation. Trudeau described the link between the returns to business (which taxes affect) and the willingness to invest in Canada. He further showed that such investment is at the heart of job creation.

Put simply, Trudeau acknowledged the link between tax rates on business and business decisions. If we want more investment, we have to be tax competitive and increasing such taxes means we’re less competitive.

Mulcair responded by criticising Trudeau’s plan to increase the personal income tax rate for Canadians earning more than $200,000 a year. Mulcair correctly explained that such a tax increase would affect people’s decision-making. His example was a doctor’s decision to locate in New Brunswick. Mulcair connected the fact that people are influenced by the tax rates they face for both work and investment when they make decisions, including on where to locate.

Both Mulcair and Trudeau articulated the fact that tax rates matter when people make decisions about whether and where to invest, start a business, or increase their work effort. Critically, both also acknowledged that we need more, not less, of these beneficial activities.

The implication of their analyses is that neither personal nor business income tax rates should be increased because we do need and want more investment, more (and better) job creation, more business start-ups, and more entrepreneurship.

The governing Tories lowered taxes during their tenure. However, outside of continuing the Chretien-Martin policy of lowering corporate income tax rates, the Tories have not introduced broad-based tax relief that improves competitiveness and the incentives for work effort, investment, and entrepreneurship.

Rather, the Tories relied on lowering the GST rate and the introduction of new – and the extension of – existing tax credits to lower the federal tax burden. Neither of these tax cuts improves basic economic incentives. Indeed, the latter simply rewards specific groups for activities they’re already doing.

In addition, the proliferation of these tax credits has increased the complexity of the tax code which, while a bonanza for tax accountants and lawyers, does nothing to improve incentives for productive economic activity. A recent analysis calculated that every Canadian household now incurs costs of roughly $500 annually simply to comply with the tax code.

As the exchanges at the Leaders’ Debate illustrates, Canada should strive for lower marginal personal and business tax rates in order to improve our competitiveness and strengthen the incentives for investment, entrepreneurship, and work effort. Such policies are the foundation for a prosperous Canadian economy.

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

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