High Tax Rates Chase Away Capital And Entrepreneurs

Do high personal and corporate tax rates have a negative impact on the Canadian economy, and hence on the overall living standards of Canadians? They do if they drive wealth to look for greener pastures beyond our borders.

In a recent blog post, tax expert Kim Moody argues that top personal tax rate increases in Canada are doing just that. For example, thanks to the federal government raising its top rate from 29 per cent to 33 per cent for the 2016 tax year, Ontario’s top combined rate jumped from 49.53 per cent to 53.53 per cent. Alberta’s top combined rate has increased even more significantly, from 39 per cent in 2014 to 48 per cent two years later.

What are the effects of such increases? Moody writes that since 2015, his firm “has seen a dramatic reduction of capital coming into Alberta and Canada.” While low oil and gas prices are obviously part of the reason, tax rate increases have also contributed to this reduction, resulting in an unfriendly investor environment.

Moody’s firm has also seen a very significant increase in tax planning work related to entrepreneurs and other individuals leaving Canada. He says that the aggregate dollar value of such departures is “very significant,” and that “[w]ithout question, the reason has been tax rate increases with such individuals looking elsewhere to deploy their capital.”

As for corporate taxes, combined federal-provincial rates remain low compared to combined U.S. rates, but that could soon change. The Trump administration is committed to substantial reductions, which would erode our advantage in this regard. Should this change come to pass, it would magnify the impact of recent personal income tax increases in Canada, further hampering our ability to attract new capital and entrepreneurs — and to retain the capital and entrepreneurs we already have.

Moody also has some interesting things to say to people who argue that Canada’s personal income tax rates are low by historical standards. While it’s true that the highest personal income tax rate was 80 per cent in 1971 (!), it’s important to remember that such astoundingly high rates were common back then, which made them less of a problem comparatively (although they still discouraged productive activity).

It’s also important to note that this 80 per cent top rate only started at $400,000, the equivalent of about $2,500,000 today after adjusting for inflation. In contrast, the top marginal rate in Alberta now kicks in at $300,000.

It was also easier back in the 1970s for businesses and wealthy individuals to plan their affairs so as to minimize their official income, but tax legislation has become much, much tighter, and enforcement too, says Moody.

Tax rates aren’t everything, of course, and there are plenty of good reasons to want to remain in Canada even though personal tax rates have gone up, and even though our corporate tax rate situation may soon deteriorate comparatively speaking. But at the margin, high tax rates are enough to drive some people to live and invest elsewhere.

To encourage them to live and invest here — and to encourage economic activity in general—we should reverse recent personal tax increases, and get ready to lower our corporate rates too, especially if expected U.S. rate cuts materialize.

Michel Kelly-Gagnon is President and CEO of the Montreal Economic Institute. The views reflected in this op-ed are his own.

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