Tax reform would provide much-needed boost for Canada’s stagnant economy

As stagnant economic growth and declining living standards become increasingly salient, it’s clear that governments across the country must change their approach. One area ripe for reform, that governments continue to ignore, is Canada’s uncompetitive personal income taxes.

In recent years, weak economic growth has resulted in an extended decline in Canadian living standards. From the middle of 2019 to the end of 2023, inflation-adjusted gross domestic product (GDP) per person—a broad measure of individual living standards—declined 3.0 per cent from $59,905 to $58,111. In other words, Canadian living standards at the end of 2023 were worse than they were four and a half years prior. And comparing this to previous periods of decline reveals that Canadians are currently facing the second longest decline in their living standards of the last 40 years.

Yet while Canada’s faltering economy and falling living standards were a major issue governments were expected to address in this year’s round of budgets, by and large the federal and provincial governments missed the opportunity to reform a key area holding back economic growth—Canada’s high taxes.

A recent study shows that Canada’s marginal personal income tax rates are relatively high compared to the United States and many international countries. Marginal tax rates—which are the tax rates on the next dollar earned—influence people’s decisions to work, invest, or engage in other productive activities.

Comparing the combined (federal and provincial/state) marginal personal income tax rates of 61 Canadian and U.S. jurisdictions shows that at varying income levels, Canadians largely face higher tax rates than their American counterparts. Specifically, when ranking the top combined marginal tax rates in 2023, Canadian provinces occupied nine of the top 10 spots among the 61 jurisdictions. Furthermore, at other income levels such as C$50,000 and C$150,000 all 10 provinces had higher marginal tax rates than every U.S. state.

Similarly, compared to the 38 industrialized countries making up the Organisation for Economic Cooperation and Development (OECD) Canada’s top combined personal income tax rate ranked fifth highest in 2022 (the latest year of comparable data). This was significantly higher than countries such as Australia (16th), the United Kingdom (19th) and the United States (23rd).

But how do high personal income tax rates inhibit economic growth?

Just as businesses compete to hire the best workers, jurisdictions compete to attract and retain highly skilled individuals, such as entrepreneurs or doctors, who contribute significantly to the economy. Though taxes are one of many factors that influence where someone lives, jurisdictions with relatively low taxes generally enjoy a competitive edge in attracting these highly productive individuals. Therefore, countries with more competitive taxes enjoy the economic growth associated with attracting and retaining high-skilled workers.

In addition, high taxes also inhibit economic growth by reducing the reward individuals receive for engaging in productive economic activities. When there’s less reward, people have less incentive to work additional hours or be an entrepreneur. In other words, when people receive less money for their hard work, they are likely to spend less time working than they would otherwise, and the economy suffers as a consequence.

Canadians are feeling the strain of a faltering economy, yet despite it being a clear drag on economic growth, governments across the country continuously fail to meaningfully address the country’s high taxes. Making Canada’s personal income taxes more competitive with other jurisdictions would introduce a much-needed economic boost.