A new study by the Fraser Institute reveals that increasing income taxes on businesses costs Canadian governments more in reduced economic activity than the revenue they gain. The fiscally conservative think tank analyzed corporate income tax rates in four major provinces, assessing their immediate impact on private investment, research and development, entrepreneurship, business activity, and productivity.
Study Findings
The study, titled How Costly Are Corporate Income Taxes in the Short Run? and authored by Ergete Ferede, found that for every $1 increase in provincial business taxes, the economic cost is $1.47 in Alberta, $1.55 in Quebec, $1.66 in Ontario, and $2.37 in British Columbia. These calculations are based on a one percentage-point increase in corporate income taxes reducing the tax base by 3.10% in Quebec, 3.47% in Ontario, 4.0% in Alberta, and 4.82% in British Columbia.
"Society loses more than what the government collects in actual tax revenue," Ferede said. "Raising business taxes is an inefficient way for governments to raise revenue, and it comes with significant trade-offs in the form of less investment and economic activity, and reduced productivity growth."
Ferede warned that with provincial governments running large deficits and accumulating debt, there may be a temptation to raise business taxes to generate more revenue, but he called this an ill-conceived policy that would further damage provincial economies.
Similar Findings Elsewhere
The Fraser Institute's report aligns with many other Canadian economic studies indicating that high taxes on income for both businesses and individuals discourage economic growth and contribute to low productivity. Canada's productivity over the past decade has lagged behind G7 countries, especially the U.S., and most developed nations in the OECD.
Low productivity has been described as a "break the glass" emergency by the Bank of Canada and the "Achilles heel" of the Canadian economy by the federal government. Many economists, including those behind the Fraser Institute study, argue that raising taxes on consumption—such as the GST and provincial sales taxes—is preferable to raising taxes on income, which discourages investment, innovation, and risk-taking.
