Declining tax competitiveness is failing Canada’s young people

Last spring, it was reported that Canadians under 35 years of age were the unhappiest cohort in the G7. Though the media dropped the topic quickly young Canadians’ dissatisfaction with their prospects persists: most young people believe they will have a harder time getting ahead than their parents did.

One reason is that starting a business and pursuing prosperity for one’s family and community seems an impossible dream for members of my generation, largely because Canada’s tax structures punish risk-takers, deterring innovation and stifling the market. When 90 per cent of businesses are doomed to fail, such dream-chasers are unicorns — maybe even fools.

But prosperity depends on people taking risks. That’s why policy-makers need to improve the market environment by lowering the overall tax burden on businesses to encourage risk-taking and reward entrepreneurship. Ottawa could start by reversing course on this year’s capital gains tax hike.

Without dreamers, innovations that could shape our everyday lives will remain unrealized. What often goes unmentioned in biopics or memoirs of successful dreamers is the head start they got in an environment supporting entrepreneurship instead of simply taxing it.

Canada is experiencing a general decline in entrepreneurship. One recent survey found that we have 100,000 fewer individuals starting businesses than 20 years ago. Unfortunately, this decline is likely to persist. Canada is steadily making it harder for young risk-takers to succeed. The message from raising the capital gains inclusion rate from 50 to 66.7 per cent is clear: frankly, we aren’t that interested in your dreams or ideas.

For many, high taxes erode the hope of starting a business and, with hard work and risk-taking, securing the prosperity their parents had.

This year Canada fell from 15th to 17th in the Tax Foundation’s ranking of international tax competitiveness. The decline was largely driven by the hike in the capital gains inclusion rate, which now stands well above the OECD average. In terms of taxes on capital gains and dividends, Canada now ranks 35th out of the 38 countries surveyed. For young entrepreneurs and foreign investors alike, higher tax on capital gains doesn’t just mean less payout if they do succeed; it signals that the government doesn’t recognize the critical role innovators play in building prosperity.

The capital gains hike is especially harmful to those who need to raise capital and secure funding, since rewards have to be commensurate with risks. By shrinking the after-tax reward, Canada discourages the risk-taking we need to keep our economy growing.

Even our corporate tax rates are higher than in most of our peer nations — 26.2 per cent compared to an OECD average of 23.9 per cent. This means that scaling up a business is costlier, which means less demand for employees and new equipment, which spells bad news for productivity and our already stagnating standard of living.

Even Scandinavian countries, often considered high-tax jurisdictions, rank far higher than Canada in corporate tax competitiveness. In the Tax Foundation’s ranking, Sweden, Finland and Norway are sixth, seventh and 13th, respectively, while Canada ranks 26th. Yet these countries are better able to balance a strong social safety net with a dynamic business environment. On the World Happiness Index ranking for people under 30, they blow Canada out of the water, ranking 18th, seventh and 20th, respectively, versus our 58th.

In a competitive global economy, small shifts can influence how investors perceive a country’s long-term potential. Our falling behind in tax means investors will continue to overlook us, finding at least two dozen jurisdictions more hospitable to growth.

Then there is the debt burden, my generation’s grey cloud. Since 2015, the Trudeau government has run 10 consecutive deficits and added $1 trillion to the national debt. Who will have to pay that down and service the interest? Younger Canadians. So it should surprise no one that our cohort is pessimistic about government. Taxing away the prospect of dreaming big is just another nail in the coffin. It sends a message: Quit while you’re ahead.

But nothing about all this is inevitable. Ottawa, whether under this government or a new one, can reverse these policies and commit to ones that reward risk. “Can” and should: because failing young people today means forfeiting our country’s future.

Samantha Dagres est conseillère en communication à l’Institut économique de Montréal. Elle signe ce texte à titre personnel.