The Fraser Institute

The Fraser Institute

October 10, 2013 06:22 ET

The Fraser Institute: High Personal Tax Rates Hinder Canada's International Competitiveness

VANCOUVER, BRITISH COLUMBIA--(Marketwired - Oct. 10, 2013) - 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 United States and other G7 nations, concludes a new study published today by the Fraser Institute, an independent non-partisan Canadian policy think-tank.

"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 study, The Economic Costs of Increased Marginal Tax Rates in Canada, highlights how a realistic understanding of Canada's personal tax competitiveness requires an examination of both federal and provincial income tax rates- which, at the top rate in 2012, ranged from 39.0 per cent in Alberta to 48.22 per cent in Quebec- and adjust for the fact that Canadian tax rates apply at income levels that are low compared to other countries.

After taking those factors into account, Canada's personal income tax competitiveness ranks in the middle of the pack of all G7 countries. Importantly, compared to the United States, 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 U.S. 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's authors, Jason Clemens, Niels Veldhuis, and Robert P. Murphy, also examine the economic effects of high marginal tax rates. Highlighting a wide body of academic research, they show that relatively high marginal tax rates negatively influence an individual's behaviour regarding investment, savings, labour supply and income reporting.

A study of the tax structures in 23 OECD countries found that a 10 per cent increase in marginal tax rates decreases a country's annual rate of economic growth by 0.23 per cent.

With the October Throne Speech expected to signal Ottawa's intentions for the 2014 budget, the authors recommend that all governments in Canada, federal and provincial, turn their attention to reducing and flattening tax rates in order to remain competitive with other countries once budgets are balanced.

"There has been some progress at the federal level to lower tax rates but further reform is needed," Clemens said.

"If current federal and provincial governments would follow through with tax reforms that result in lower marginal tax rates, Canada would be in a much better position to attract investment, capital and labour."

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The Fraser Institute is an independent Canadian public policy research and educational organization with offices in Vancouver, Calgary, Toronto, and Montreal and ties to a global network of 86 think-tanks. Its mission is to measure, study, and communicate the impact of competitive markets and government intervention on the welfare of individuals. To protect the Institute's independence, it does not accept grants from governments or contracts for research. Visit

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