Canada is Losing Its Competitiveness

Commentary, Economy, Ian Madsen

Canada is gradually losing its competitiveness. According to the Institute for Management Development (IMD)1, a graduate business school and research centre, we are down three spots from 2018 to 13th. Canada is now ranked below the USA and Switzerland, as well as other energy-dominated nations such as Norway, the UAE and Qatar, and, consequently, its attractiveness as a place to live, work, invest, start or operate a business, or retire in, has dropped. 

Abundant natural resources, relatively safe streets, good public schools, strong rule of law, relatively easy immigration rules, efficient financial markets, and a well-educated workforce are no longer sufficient; all but the first are essential in any modern, dynamic, robustly growing economy, which Canada currently lacks. Its GDP growth rate is about 2 percent, barely above the population growth rate of roughly 1 percent. Fostering investment is crucial to raising productivity, and thus growth and living standards.

Canada’s ease of doing business ranking and reputation is already falling. In the World Bank’s annual survey of the same, Canada was ranked 22, below some nations that were previously not in its league, such as North Macedonia and Malaysia, and well below other advanced nations. While the Bank does not examine the tax burden on individuals or companies directly, it does look at ease of paying taxes, including complexity.2 

Intriguingly, the World Bank cites studies showing a ten percent reduction in tax complexity is equivalent to a one percent reduction in the tax rate. Tax burdens are not directly examined by the bank, but complexity makes it hard and more expensive for small businesses to file taxes.3 

One relatively easy way to reduce tax complexity is to make the calculation of corporate income tax congruent with International Financial Reporting Standards, ‘IFRS’. This is not difficult, although it may require adjustment of rates to bring in the same amount of money for Ottawa and the provinces. It would also make it more difficult for politicians to make the tax code a ‘Christmas tree’, festooned with shiny baubles of exclusions, deductions, credits, and preferences that seek to direct business investment and behaviour towards political ends.  

In the United States, our biggest trading partner and closest competitor, most of these were done away with in the great tax reform package in the United States, which came into force in 2018 and brought about a surge in capital investment (only later counteracted by harsh trade action which harmed business confidence). 

In that nation, rates were also reduced, to 21 percent, which superficially appears worse than Ottawa’s 15 percent, but the US rate is effectively on free cash flow, not income, making the overall burden lower and also making it more attractive to spend on machinery, equipment, instruments, and structures. Also, provincial rates add 11 – 13 percent to the Canadian total, whereas many states in the U.S. have low, or even no state income tax. 

Canada also lacks critical mass in certain key sectors: semiconductors and computer hardware; biotechnology, pharmaceuticals and medical devices and instruments; defense electronics and aerospace; information technology and venture capital. Canada has to try harder to attract and retain businesses, and the high quality, well-paying jobs those businesses generate. Trying harder includes making corporate income taxes simpler, and lower. The former can be done intelligently and carefully, and the latter can be done gradually, as the province of Quebec is doing.

Taxation on individuals is another matter that is politically contentious. If this nation wanted to make a bold effort to incentivize entrepreneurial spirit, it would make the tax rate on incomes over five or ten million dollars per year lower than those in the next-lowest bracket – to give high earners something to strive for.  

It would also attract investors from around the world that could revitalize the economy and accelerate the incipient trends of diversifying into the industries of tomorrow that are struggling to emerge and thrive in the sluggish miasma that obtains now. Since that brave move is unlikely, there is still a persuasive argument that can be made to raise the highest tax bracket where the 33 percent federal rate kicks in from $214,368, to, say, $600,00; and raise the bracket for the next lowest rate, 29 percent, from $150,473 to around $300,000 (it should be noted that many countries have low, flat taxes of 15 percent or so).4

While some revenue may be lost initially, it could be recovered by stronger enforcement and collection, eliminating some deductions, and by inducing more current income generation (such as realization of capital gains). Relatively modest tax cuts can even be costless if economic growth covers them.

Canada does not exist in a vacuum. It is competing for the best talent and the hungriest capital from around the world. It does not have its own Silicon Valley, biotech ecosystem, or defense sector, and no gimmicks and giveaways by Ottawa or the provinces will really change that. However, some smart reforms to taxes, and a change in attitude and approach, can garner more interest and investment at home and from abroad to make Canada a strong player in world competitiveness, and not an also-ran. 

Under the cover of supposed minority government ‘weakness’, the government can make a pro-growth, pro-business case for change along these lines, and some of the opposition parties it needs to make it happen would be hard-pressed to obstruct such a plan. Only some imagination and courage is needed – which is not necessarily in the short supply that some critics say it is. Prove them wrong, Ottawa.

 

 

Ian Madsen is a senior policy analyst with the Frontier Centre for Public Policy.