Income tax increases enacted in Canada over the past several years have hindered the development of new businesses across the country, a new study says.
The Montreal Economic Institute (MEI) says that every time the marginal income tax rate increases by a percentage point, it results in a 0.21 percentage point loss in the business entry rate.
That is the equivalent of 2,455 fewer businesses created across the country for each point the tax rate goes up, MEI said.
“The greedier the government gets, the less money individuals have left to finance their projects,” Emmanuelle B. Faubert, economist at the MEI and author of the study, said in a news release.
“The result is that thousands of potential entrepreneurs have to delay their business ventures, which negatively effects employment, innovation, and productivity.”
The study said that since 2015, tax increases have hindered the development of around 12,195 new businesses in Canada.
Tax Revenue to Support Electric Vehicle Production
In his calculations, Mr. Faubert concludes that the increased tax revenues that hindered new business development are equivalent to subsidies the federal government is giving to support a pair of electric vehicle plants in Ontario.
“Ottawa expects to take in $456.8 billion. In other words, the $2.88 billion collected due to the new bracket added in 2016 represents just 0.63 percent of the federal budget,” he wrote in the study.
He compares that with production subsidies offered to Volkswagen for an electric vehicle battery plant in St. Thomas, Ontario, and funds given to Stellantis for a similar plant in Windsor.
In April 2023, the Canadian government announced it would provide up to $13.2 billion in tax credits to Volkswagen. The government also said it would provide a grant of $700 million for the plant.
However, in June, the parliamentary budget officer said that the sum was likely going to increase by about $2.8 billion.
Stellantis is set to see up to $15 billion for this production of the plant in Windsor.
“We must not forget that with unemployment rates currently quite low and a significant labour shortage, there is no guarantee that the new positions created in the new battery plants will be filled,” Mr. Faubert said in the study. “We therefore run the risk of having taken billions of dollars out of taxpayers’ pockets, and having negatively impacted entrepreneurship, just to displace jobs from one sector (or one company) to another.”
He concluded the study by saying the government’s actions have dampened the spirit of entrepreneurship across the county—a spirit that is essential to economic growth, he wrote.
“It would be wiser to let the dynamism of the market direct the country’s economic growth, through the actions of the numerous businesses that come and go, but that never stop innovating and investing. To do so, we need a competitive environment that is favourable to entrepreneurship and investment, and instead of increasing top personal income tax rates, we need to reduce them.”
