High personal taxes impair competitiveness with peer countries

Fraser Institute study puts Canada well behind the US and mid-pack among G7.

October 10, 2013   by PLANT STAFF

VANCOUVER — High federal and provincial personal income tax rates and the relatively low level of incomes at which they apply are hurting Canada’s economic competitiveness with the US and other G7 nations, concludes a new study by the Fraser Institute.

“Thanks to federal tax reforms in 1990s and the early 2000s, Canada’s business and investment taxes are competitive with its peer countries. But when it comes to combined federal and provincial personal tax rates, Canada falls behind,” said Sean Speer, Fraser Institute associate director of fiscal studies.

The Canadian policy think-tank with offices across Canada pegs the top rate of federal and provincial income tax rates from 39% in Alberta to 48.22% in Quebec, but notes those tax rates apply at income levels that are low compared to other countries

The Economic Costs of Increased Marginal Tax Rates in Canada says taking those factors into account, Canada’s personal income tax competitiveness ranks in the middle of the pack of all G7 countries, but compared to the US, we fare poorly.

At an income level of $132,406 – the income level at which Canada’s top federal tax rate applies – every province’s combined provincial and federal marginal tax rate is higher than the combined federal/state tax rates in every US state.

“Because of Canada’s close proximity to the United States, the disparity in total income tax rates puts Canadian provinces at a real disadvantage,” Speer said. “If Canada wants to encourage investment, business development, entrepreneurship and work effort, we need to lower marginal tax rates and increase the income thresholds at which they apply.”

The study also examines the economic effects of high marginal tax rates. It looks at 23 OECD countries finding that a 10% increase in marginal tax rates decreases a country’s annual rate of economic growth by 0.23%.

Click here for a copy of the study results.

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