Ontario Can Boost Entrepreneurship By Reducing Personal Income Tax

Entrepreneurship remains a vital source of innovation, which helps economies grow and provide employment opportunities for Ontarians. Unfortunately, several recent studies have found that fewer businesses are being created in Ontario (and across Canada), indicating a long-term decline in entrepreneurship rates. This downward trend could have negative and pervasive effects on the economic well-being of Ontario.

Given the current state of entrepreneurship, there is increasing questioning about the impact of government policies and policies that could reverse the decline. One common point of these debates is tax policy. Do higher personal taxes hurt entrepreneurs? If so, to what extent does the evolution of tax rates affect entrepreneurship? And since Ontario has increased its top tax rate in 2013 to 20.5% from 17.4%, these issues are relevant and have real consequences for Ontarians. a higher tax rate can affect entrepreneurship in two ways. On the one hand, it can discourage entrepreneurial activity because it is inherently risky and that entrepreneurs pay significant taxes on all income (labor income, capital gains or dividends) when they are successful. And while a higher tax rate may save entrepreneurs money when they suffer losses, these benefits are very limited. In simple terms, higher taxes lower the reward for entrepreneurs but do little to mitigate risk.

That said, how does the rise in income tax rates affect entrepreneurship? A recent study by the Fraser Institute sought to answer this question. Specifically, the study badyzed Canadian provincial data from 1984 to 2015, examining the effects of the top personal income tax rate on entrepreneurship, while taking into account the effects of the Canadian federal tax rate. other factors such as demographics, corporate taxation and economic conditions. To measure entrepreneurship, the study uses the entry rate of firms, defined as the number of new businesses as a percentage of total firms.

The results are telling and clearly relevant for Ontarians: Increase the personal tax rate with the highest rate of entrepreneurship. In Ontario, for every one percentage point increase in the top personal income tax rate (all things remaining constant), 696 new businesses would enter the economy in the longer term (in this context, about four years).

However, in 2013, the Ontario government increased its maximum personal income tax rate by 3.1 percentage points. According to the results of the study, we estimate that there will be 2,158 less start-up businesses in the province because of the higher tax rate.

To put this into perspective, over the last 30 years, an average of 50,638 new businesses have emerged in Ontario each year. Compared with the average number of companies created each year, the increase of 3.1 percentage points of the highest tax rate will reduce the number of new businesses by 4.3 percent. Given that the federal government also increased its top tax rate by four percentage points in 2016, Ontarians can expect the decline in entrepreneurship to be even more pronounced.

The Canadian economy has been experiencing a decline in entrepreneurship for years. If Ontario wants to stop this decline and encourage entrepreneurship, it would be good to start by reducing the highest tax rate. At the very least, if Ontario decision makers do not want to worsen the decline, they should refrain from further raising the province's highest tax rate.

Ergete Ferede is an badociate professor of economics at MacEwan University of Edmonton and Charles Lammam is director of financial studies at the Fraser Institute. The study entitled "The Effects on Entrepreneurship of Higher Provincial Income Tax Rates in Canada" is available at www.fraserinstitute.org