Ontario Tax Policy Strangles Business

Ontario’s provincial government has put forward key priorities to judge its performance in four years. Better student achievement, healthier Ontarians, better workers, safer communities and more active citizens - all are laudable goals, even if the political communications equivalent of motherhood and apple pie.

Unfortunately, a new tax study shows how a crucial ingredient for reaching these objectives – more money from a vibrant economy - is being hampered by the government’s very own actions.

The Liberals have already raised corporate taxes and have signalled a willingness to increase other taxes and fees to battle their $5.6 billion deficit. This policy course is based on a false premise: that changes in taxes have no impact on job and wealth creation.

The new research shows that this is a chimera. Hiking tax levels will only serve to chase away new jobs and businesses that are needed to support public spending.

The study, done by Eugene Beaulieu and colleagues at the University of Calgary and published by the Fraser Institute, calculates effective tax rates on the costs of manufacturers.

The study looked at 95 percent of Canada’s manufacturing base by industry and province and assessed the impact of labour and capital taxes on output. In technical terms, the study calculated effective tax rates on marginal business costs, using corporate income taxes, capital taxes, payroll taxes, personal incomes taxes and sales taxes.

The overall conclusion is that manufacturing competitiveness has been falling as effective taxes have risen. Since 1970, there has been a one-quarter proportionate increase in the effective tax burden, caused largely by increases in labour taxes. Within that envelope, effective payroll taxes in Ontario have tripled, and sales and personal income tax rates have doubled. Capital input taxes have also risen.

The Liberal government now proposes to increase that burden even more, with capital and income tax hikes for businesses, health care premiums and user fees for labour, and cancelled tax credits and exemptions for both.

Is it true that changes in tax levels have no impact on the economy, as Finance Minister Greg Sorbara suggested recently?

Not according to this work. The researchers find that every percentage increase in effective taxes (from the present estimated national level of 20 percent to 20.2 percent) leads to a one-third of a percent drop in the creation of new businesses. Such a tiny change kills the potential for 115 new firms at the national level in a sector that accounts for less than one-fifth of the economy. Imagine the numbers in Ontario with multi-billion dollar tax increases already underway.

On a secondary but important point, the study finds that effective tax rates vary dramatically across provinces and industries and over time.

For example, rates in Ontario industries in the most recent year of the study varied from 7 percent to 23 percent. There are also large and senseless differences across provinces for the exact same industries. This suggests that there is room for tax reform to iron out the distortions that are needlessly raising costs on wealth creation.

Based on all this, there must be a better option for Ontario that both improves our competitiveness and beats the deficit.

The international evidence is quite clear: lower and less distortionary taxes, and less but more productive public spending, are associated with a higher standard of living and a faster economic tempo. A province with a Tax Freedom Day at June 26th and per capita spending at all-time record levels can obviously benefit from lower taxes and spending.

And besides, the deficit is caused by excessive and inefficient growth in government, not a lack of taxation and spending. A program to reduce and reform income, capital and payroll taxes may not have been on the McGuinty government’s agenda, but it is the surest way to ensure that the province’s standard of living rises at the fastest possible pace.

The battle against Ontario’s provincial deficit will be no doubt be won eventually. Needless casualties in the form of lost employment and business opportunities are not, however, warranted. It is a self-inflicted injury for the government to handicap its own objectives by compromising the revenue base of the economy. If only they had added a sixth priority to their list: greater prosperity for the citizens of the province.