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Thursday March 29, 2018

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Tax Regulation

Clear and present danger to Canada's prosperity

Tax and regulatory increases impair the willingness to invest in Canada. And that strikes at the heart of our economic health - By Jason Clemens, Milagros Palacios and Niels Veldhuis

The idiom "the straw that broke the camel's back" describes a minor or routine action that causes a large and sudden reaction because of the cumulative effects of many other small actions. This might well describe the state of business investment and entrepreneurship in Canada.

After years of mounting tax and increased regulation, coupled with a decidedly anti-business rhetoric from many capitals across the country, it seems the back of business investment and entrepreneurship in Canada has been broken.

The question is whether governments in Canada are interested in repairing it.

The list of policy changes that have made Canada a less attractive place to do business is significant. In recent years, the federal and many provincial governments increased already uncompetitive personal income tax rates to the point where the top combined rate now exceeds 50 per cent in seven provinces, with the remaining provinces just below 50 per cent. And because Canada's capital gains tax is linked to personal income taxes, these rate changes have also increased capital gains taxes.

The federal and several provincial governments have also added more complex and burdensome regulations on labour, energy, infrastructure projects, environment, health and safety, and finance, to name just a few.

In addition, Ottawa continues to push forward with national carbon-pricing despite the United States and other competitors such as Australia reversing course. Even advocates for carbon-pricing have criticized Canada for an overly complex approach.

Importantly, most of these policy changes were enacted before the recent sweeping tax reforms in the U.S., which for the first time in over two decades mean Canada's business taxes are no longer competitive with the U.S.

U.S. reforms will lower the effective tax rates on new investments from 34.6 per cent to 18.8 per cent. Canada's comparable rate on new investments is 21.2 per cent, and both Prime Minister Justin Trudeau and the Finance Minister Bill Morneau have flatly stated Canada will not respond until there's clear evidence of the need to do so.

Given Canada's dismal business investment and entrepreneurship performance, it's not clear what additional information they require.

Since peaking at the end of 2014, total business investment - excluding residential housing and adjusted for inflation - is down almost 17 per cent. Private-sector investment in factories and other structures is down 23.3 per cent and investment in machinery and equipment is down 6.6 per cent.

Moreover, a 2017 study by Philip Cross, former chief analyst at Statistics Canada, ranked Canada 16th of 17 countries for business investment between 2015 and 2017 compared to eighth place from 2009 to 2014.

And finally, investment in Canada by foreigners has collapsed. Foreign direct investment in Canada in 2017 was $31.5 billion, just 56 per cent of 2013 levels, when it totalled $71.5 billion.

This is all bad news for Canada's growth prospects. Private-sector investment is the lifeblood of new and existing companies. It provides the resources for new equipment, innovation, new products and, ultimately, sustainable and prosperous employment for Canadians. The decline in private-sector investment is surely one of the reasons that economic growth is expected to slow markedly in coming years.

It seems clear that tax and regulatory increases, coupled with policy changes in the U.S. (including uncertainty over the North American Free Trade Agreement), have impaired the willingness of businesses and entrepreneurs to invest in Canada. Even more worrying is that most of the country's political leaders seem oblivious to this clear and present danger to Canadian prosperity.

It's high time we start repairing our business and investment environment by removing policies that have broken the backs of businesses and entrepreneurs in Canada.

Jason Clemens, Milagros Palacios and Niels Veldhuis are economists with the Fraser Institute and co-authors of the End of the Chretien Consensus.



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