Study Finds Business Tax Reform is Crucial for Increasing Investment and Improving Living Standards

October 11, 2024 TruthUSA

Ottawa could enhance business investment and improve living standards by implementing reforms to the business tax structure, as suggested by a recent study conducted by the non-profit think tank Fraser Institute.

“The concerning lack of business investment in Canada can be addressed by reforming our business taxation model,” stated report author Trevor Tombe says.

According to Statistics Canada report in August, Canada’s per capita GDP has decreased for five consecutive quarters, unlike the U.S., where per capita GDP has been on the rise since 2023 by 2.6 percent and 4.5 percent since 2022, as noted by Tombes.

Tombe mentioned in the report, “Had Canada simply matched US growth, for example, our economy would be 8.5 percent larger today, equating to an average annual income increase of $6,200 per Canadian.”

He highlighted that the current gap between Canada and the U.S. is the widest it has been in nearly a century. Tombe emphasized, “Reforming Canada’s approach to business taxation is a crucial part of the solution.”

The study proposes three main reforms: ceasing to tax business profits and focusing on dividends, bonuses, and share buybacks instead; lowering the marginal effective tax rate; and urging B.C., Saskatchewan, and Manitoba to align their provincial tax with the GST.

Stop Tax on Profits

The report suggests shifting the focus from taxing business profits to taxing profit distributions like dividends and bonuses, enabling companies to reinvest profits without facing tax penalties. Tombe explained, “No tax would be imposed on profits retained by the corporation for investments in operations, equipment, buildings, etc.”

The current tax system discourages the growth of smaller companies, with a tax rate that is six percentage points higher for larger businesses.

“This dynamic may incentivize companies to remain small to benefit from favorable treatment. It could also encourage the entry of smaller and less productive firms, hindering growth,” as per the report.

Cut METR

Ottawa should also reduce the marginal effective tax rate (METR), viewed as a measure of investment returns lost to taxation, according to Tombe. For instance, a company making an 8 percent profit after taxes could have made 10 percent without taxes, resulting in a METR of 20 percent.

The report warns about the projected increase in METR from the current 14 percent to 17 percent in four years.

Tombe stated, “Each percentage point rise in METR is estimated to reduce investment by about 1 percent or more,” impacting productivity growth and purchasing power negatively.

The federal government notes that Canada’s average METR of 14.5 is the best among the G7 countries, which average 24.8, and much better than the U.S. at 19.7. The Finance Department emphasized the importance of maintaining a competitive METR for Canada’s investment appeal in a backgrounder released earlier this year.

Harmonize PST to GST

Encouraging British Columbia, Saskatchewan, and Manitoba to align their provincial sales taxes with the federal GST, a move already adopted by other provinces, would significantly enhance business tax competitiveness. This adjustment would eliminate sales taxes on input purchases, reduce compliance costs, and eradicate administration expenses, as per the study.

Tombe emphasized, “Given Canada’s status as a small, open economy in an increasingly uncertain global landscape, prioritizing growth-oriented economic and tax policies is essential. While we cannot control global developments, fine-tuning our business tax policies is within our reach.”

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