By Charles Lammam
and Hugh MacIntyre
The Fraser Institute
Governments across the country, both federal and provincial, want Canada to become a knowledge-based economy that attracts and retains the world’s brightest and most talented while ensuring all Canadians realize their full potential.
For example, Prime Minister Justin Trudeau, in his recent Davos speech at the World Economic Forum, tried to convey a vision for Canada that depicts the country not simply as a resource-rich nation but a leader in the so-called knowledge-based economy.
In Ontario, Kathleen Wynne’s government has set out a plan to ensure the province “has the skilled and productive workforce it needs to meet the demands of the 21st century.” In fact, Premier Wynne recently established an expert panel to develop a “highly skilled workforce strategy.”
No doubt, Prime Minister Trudeau and Premier Wynne’s goals are laudable. The problem, however, is that their governments are enacting policies that directly counter this rhetoric. Nowhere is this clearer than on personal income tax policy, a key pillar of Canada’s overall economic policy climate.
With a global market for highly mobile talent, high personal income tax rates make it harder for a country to attract and retain skilled workers, entrepreneurs and investment. It’s therefore discouraging that Canadian governments have made our personal income tax system markedly less competitive in recent years.
Take the Trudeau government’s recent change that added a new income tax bracket, raising the federal top tax rate from 29 to 33 percent. This four percentage point increase must be placed within the context of several provinces having already raised their own top tax rates in recent years. For instance, Ontario increased its top provincial tax rate from 17.4 to 20.5 percent, while Alberta increased its top rate from 10 to 15 percent.
Consequently, in Ontario, the top combined federal-provincial personal income tax rate is now 53.5 percent. This means that Canadians in this province and the relevant tax bracket can lose more than 50 cents of every extra dollar they earn in labour income to taxes. In fact, the top combined federal-provincial personal income tax rate is now above 50 percent in six of the 10 provinces.
Even before the recent tax hikes came into effect, Canada’s top personal income tax rates compared unfavourably to those in the United States and other industrialized countries. The increases since 2009 have simply made things worse.
Canada’s top combined personal income tax rates are now among the highest in the industrialized world. In 2014, the latest year of available international data, Canada had the 13th-highest combined top tax rate out of 34 countries (using Ontario’s provincial rate). The new 2016 Canadian top tax rate (53.5 percent) is sixth highest relative to the 2014 international rates and second highest among G7 countries, behind only France.
The fact that Canada’s top tax rates are often applied to lower levels of income than in other countries further erodes our tax competiveness.
A robust body of research shows that a competitive personal income tax regime is an important way governments can help attract, retain and develop a skilled workforce. After all, high and increasing personal tax rates reduce the reward of earning more income and discourage people from engaging in productive economic activity (working hard, expanding skills, investing and being entrepreneurial), ultimately hindering economic growth and prosperity. There’s general agreement in the economic literature on this point.
Politicians can continue speaking about the importance of building a highly skilled workforce, but talk is cheap and it won’t do much to actually achieve this important goal. Governments across the country must understand that higher personal income tax rates work counter to the objective of attracting, retaining and developing skilled labour.
Charles Lammam, Ben Eisen, and Hugh MacIntyre are co-authors of the Fraser Institute study Canada’s Rising Personal Tax Rates and Falling Tax Competitiveness.