According to projections, from 2020 to 2030, Canada will be the worst-performing advanced economy among 38 OECD countries for growth in per-person GDP, a common measure of a country’s prosperity.

And Canada’s uncompetitive business tax rates—which limit economic growth by stifling innovation, discouraging investment, lowering wages and reducing job creation—are partly to blame.

Governments levy business taxes on profits—that is, the returns on investment that businesses make. Just as personal income taxes change the way individuals act or affect the decisions they might make, business taxes change the behaviour of businesses. Because business taxes reduce returns on investment, businesses often redirect investments towards jurisdictions with relatively lower taxes. Due to this, jurisdictions compete with each other through business taxes to attract more businesses and/or investment.

In Canada, both the provinces and the federal government impose business taxes, so we must consider both tax rates together. The federal corporate income tax rate is 15 per cent while provincial rates vary from 8 per cent in Alberta to 16 per cent in Prince Edward Island. The OECD estimates Canada’s combined rate to be 26.2 per cent, assuming a representative provincial rate of 11.2 per cent.

OECD countries including Canada compete with each other to attract investment. In the OECD, Canada has the 12th-highest combined business income tax rate, higher than the United States (25.8 per cent), the United Kingdom (25.0 per cent) and the OECD average (23.6 per cent).

Countries with the lowest business tax rates include Hungary, Ireland and Lithuania, which all have rates at or below 15 per cent. While Canada’s federal rate has remained unchanged since 2012, countries such as France, Sweden and the U.S. have all since reduced their rates and become more tax competitive than Canada. Clearly, Canada’s relatively high business tax rate is uncompetitive with the majority of OECD countries, and most importantly the U.S.

The empirical research makes a convincing case for why Canadian governments should reduce their business tax rates to help raise living standards for Canadians.

Indeed, high business tax rates reduce innovation because investing in new technologies or ideas is inherently risky so businesses need high returns to engage in these investments. High tax rates can also lower worker wages because instead of taking the hit to their profits, businesses often reduce costs by lowering wages. And high business taxes stifle job creation because when there are fewer new businesses, projects or investment opportunities, there’s a lower demand for workers.

You can’t overstate the importance of competitive business tax rates. It’s not the only thing businesses consider when planning to invest, but it’s a major factor. To avoid falling further behind other advanced economies on living standards and economic growth, Canadian governments should lower their business taxes.