Canada's Business Taxes Destroy Entrepreneurism, Says Study

by Mike Godfrey, Tax-News.com, Washington

05 March 2004

Canada is destroying new companies and jobs by perpetuating a distorted and punishing business tax system, according to an electronic paper released on Wednesday by The Fraser Institute.

The study, entitled ‘Effective Tax Rates and the Formation of Manufacturing Enterprises in Canada,’ calculated the rates from corporate income taxes, capital taxes, payroll taxes, personal incomes taxes and sales taxes on business for twenty-one manufacturing industries in six provinces between 1970 and 1997.

“We found that increases in these taxes kill off potential new businesses. A one percent increase is related to a one-third of a percent decline in new manufacturing establishments. This means that a tiny rise from the current tax level of 20.0 percent to 20.2 percent destroys the potential for 115 new firms. This is the real effect of high business taxes - lost opportunities for Canadian businesses and workers,” observed Eugene Beaulieu, associate professor of economics at the University of Calgary and co-author of the study.

The study also found that effective business tax rates have increased on average since 1970, even though statutory corporate income tax rates have come down. In addition, the institute argues that the current tax system discriminates against business investment and job creation by taxing companies differently by region and by industry.

For example, Ontario’s industrial rates varied from 7 percent to 23 percent in the most recent year of the study. There are also dramatic differences across provinces for the same industry.

“Tax distortions that are locked in place right now are damaging the economy,” commented Mark Mullins, the Institute’s director of Ontario policy studies. “The issue is particularly acute for Ontario, where the government is busy raising business taxes on the misguided notion that there will be no real impact on job creation.

“Every province and the federal government should have tax reforms on their spring budget agendas,” Mullins concluded.

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