Fraser Institute invited to testify on 'taxes' before House of Commons finance committee

This is the verbatim transcript of remarks made by Charles Lammam, the Fraser Institute's director of fiscal studies, to House of Commons Standing Committee on Finance—Bill C-2, on Thursday, April 14, 2016

Hello. Thank you Chairman Wayne Easter and the rest of the committee for giving me an opportunity to share the work of the Fraser Institute with you today. I hope that you find my comments helpful and informative as you deliberate these important public policy issues.

My name is Charles Lammam, I’m the Director of Fiscal Studies at the Fraser Institute—an independent, non-partisan economic policy think-tank. The mission of the Institute is to help average Canadians understand the impact of government policies on their lives, and the lives of future generations. I’ve been studying Canadian tax policy for a decade now and have published several peer-reviewed studies on a range of economic policy issues including taxation and government finances. Last month, I co-authored a study entitled Canada’s Rising Personal Tax Rates and Falling Tax Competitiveness, so much of my remarks will draw on the findings of that research.

I should note that my comments today reflect my own opinions and observations of the research we have conducted. I do not speak for anyone else at the Fraser Institute.

Let me begin by saying that a competitive tax system is critical to fostering a positive economic climate. Empirical evidence from across the world shows that taxes can influence whether people engage in economically productive activities such as working hard, expanding their skills, investing, and being entrepreneurial—activities that ultimately drive economic growth and prosperity. Over the past 15 years, federal and provincial governments in Canada of different political stripes have improved the competitiveness of our business tax regime, but little has been done on personal income taxes.

Personal income taxes are particularly important when it comes to building a knowledge-based economy, and attracting and retaining highly skilled workers such as entrepreneurs, doctors, lawyers, business professionals, engineers, and computer scientists. The new top federal marginal tax rate proposed by Bill C-2, as well as recent tax rate increases in many Canadian provinces, harm our ability to attract skilled workers and in fact discourage Canadians from realizing their full potential.

Critically, the new top federal marginal rate of 33 per cent is being layered on top of several tax increases by the provinces on highly skilled workers. For instance, as a result of federal and provincial tax rate hikes, the combined top federal-provincial statutory marginal rate in Ontario has increased from 46.4 per cent in 2009 to 53.5 percent this year—more than a 7 percentage point increase.

According to the latest available international data, Ontario’s top combined marginal rate is the 6th highest among 34 OECD countries and 2nd highest among G7 countries, behind only France.

More broadly, due to recent tax hikes, the top combined rate is now above 50 percent in six of 10 provinces. Consider that for a moment. In many Canadian provinces, including Canada’s two largest, highly skilled workers can lose more than half of each additional dollar earned in labour income to personal income taxes.

Again, the economic evidence shows that high and increasing marginal tax rates discourage productive economic activity, making Canada a less desirable place to work, invest, and be entrepreneurial. They can also influence decisions about where highly skilled labour decides to live and work. There are, of course, many reasons why someone might decide to move to another jurisdiction, but empirical research shows that marginal tax rates can play an important role in that decision, particularly for highly skilled workers.

The fact that Canada’s tax rates often apply to lower levels of income than other countries further erodes our personal tax competiveness. Consider that at an annual income level of either $150,000 or $300,000 CAD, every province’s combined statutory marginal tax rate is higher than the combined tax rate in every U.S. state. This presents a clear challenge to Canada’s ability to attract and retain highly skilled workers relative to our southern neighbour.

It is not just Canada’s top personal tax rate that is uncompetitive. In most provinces, a Canadian making $50,000 CAD faces a higher statutory marginal tax rate than they would in most U.S. states. This is despite the reduction in Canada’s federal rate from 22 per cent to 20.5 per cent. In other words, Bill C-2 does little to address uncompetitive tax rates even for middle tax brackets.  

But the importance of a competitive tax system is not just about fostering a skilled workforce. By discouraging productive economic activity, high and increasing tax rates ultimately diminish economic growth and prosperity. Indeed, because high and increasing tax rates adversely affect economic incentives, governments often receive less revenue from tax rate increases than expected.

In a study published last year, entitled Reforming Federal Personal Income Taxes—A Pro-Growth Plan for Canada, my co-authors and I offered an alternative, detailed, cost-neutral tax reform plan that would allow the federal government to more aggressively reduce middle marginal tax rates while improving, not harming, Canada’s economic competitiveness. We recommended simply eliminating the two middle personal income tax brackets in the old system, leaving one tax bracket with a statutory rate of 15 per cent for the overwhelming majority of Canadians and a single high-income bracket of 29 per cent, affecting approximately two per cent of taxpayers.

To help finance this tax change, the government can eliminate or reduce ineffective tax expenditures—which, incidentally, is one of the current government’s stated priorities.

In closing, it is worth noting that past federal governments, both Liberal and Conservative, have acknowledged the importance of a competitive personal income tax system. For example, the economic plan of Paul Martin’s Liberal government in 2005 called for lower personal taxes to “provide greater rewards and incentives for middle-and high-income Canadians to work, save and invest” and to “encourage more Canadians to invest in their skills and to remain in Canada, where their talents will help build a stronger, more prosperous economy.” In 2006, Stephen Harper’s Conservative government made a similar point in its own economic plan. Unfortunately, since then, marginal tax rates on highly skilled workers have generally become less, not more, competitive.