{"id":12045,"date":"2024-05-16T15:00:15","date_gmt":"2024-05-16T12:00:15","guid":{"rendered":"https:\/\/ch.jfdi.cc\/?p=12045"},"modified":"2024-05-16T15:00:15","modified_gmt":"2024-05-16T12:00:15","slug":"canada-just-started-the-largest-tax-increase-youve-never-heard-of-the-hub","status":"publish","type":"post","link":"https:\/\/ch.jfdi.cc\/?p=12045","title":{"rendered":"Canada just started the largest tax increase you\u2019ve never heard of – The Hub"},"content":{"rendered":"

The latest federal budget did little to address Canada\u2019s mounting productivity challenge. Instead, the government focused on measures that, it argues, will increase \u201cgenerational fairness.\u201d
\nOne such move sparked considerable debate: increasing capital gains taxes.
\nThis is an important debate to be had, to be sure, but there are other tax changes coming that have been completely lost in the shuffle.
\nA significant increase in taxes on new business investment throughout the Canadian economy is most concerning of all.
\nIt is likely the largest tax increase you\u2019ve never heard of. And it will lower investment and productivity at a time when we need more of both.
\nSo what is this tax change? And why does it matter?
\nIt all comes down to how quickly companies can write off capital investments, and to the 2018 corporate tax changes that are now gradually being phased out.<\/p>\n

<\/figure>\n
The Trump tax cuts<\/strong><\/h5>\n

In 2017, the U.S. implemented significant tax reform. Among many other changes, they lowered their corporate tax rate from 35 percent to 21 percent and allowed companies to immediately deduct the full cost of certain capital investments. A company spending $1 million on new equipment could \u201cexpense\u201d the full amount immediately, lowering its taxable income and tax bill.
\nBefore the change, the company would write off this investment over years. And since a dollar today is worth more than a dollar tomorrow, accelerating the write-offs is essentially a tax cut.
\nTo understand the impact of these changes, consider one particularly useful measure: the \u201cmarginal effective tax rate\u201d on investment, or METR for short. If a project delivers a 10 percent return before taxes but leaves only 5 percent for the investor after all taxes are paid, then the effective tax rate is 50 percent\u2014taxes consume half of the investment\u2019s returns.
\nUsing this measure, the U.S. changes lowered their METR by roughly 11 percentage points\u2014from 29.8 percent to 18.7 percent. That\u2019s an enormous tax reduction.
\nSerious analysis suggests this could boost the U.S. economy by 1.7 percent, increase wages by 1.5 percent, and increase the total capital stock by 4.8 percent, mainly due to increased investment levels.<\/p>\n

Canada\u2019s (temporary) response<\/strong><\/h5>\n

Fearing a loss of competitiveness, Canada followed in 2018 by also lowering taxes on new investments\u2014not through tax rate reductions, but by allowing faster write-offs.
\nBut here\u2019s the catch: these changes were temporary.1<\/sup>Many of the U.S. tax changes were also temporary. But the negative effect of Canada increasing its tax on investment exists regardless of what the U.S. does.<\/span>
\nStarting in 2024, they are gradually being phased out and will be fully eliminated after 2027. The incentive to invest in Canada will consequently fall.
\nOverall, the effective tax rate placed on new investment in Canada is set to increase from 13.7 percent to nearly 17 percent.
\nCertain types of investment will see even larger increases. The tax on machinery and equipment investment\u2014a critical source of labour productivity growth\u2014will see an increase from 5.7 percent to 14.2 percent! And there are differences across sectors, as I illustrate below.<\/p>\n

Graphic credit: Janice Nelson. <\/em><\/figcaption><\/figure>\n

The effective tax rate in agriculture will increase from 8.1 percent to 11.6 percent, in construction from 20.8 percent to 22.5 percent, and in services from 17.2 percent to 20.7 percent. The largest increase of all is in manufacturing, which will see the tax on its investments nearly triple <\/em>from 3.1 percent to 9 percent.
\nThe consequence: smaller investment returns and, therefore, less investment and capital for Canadian workers and businesses.
\nIt\u2019s tough to say by how much, but the generic point is not controversial. By reducing the returns received by an investor, fewer investments will be made. There is considerable evidence for this. Some estimates suggest that, roughly speaking, a 1 percent increase in the METR may lower investment by as much as 1 percent or more.<\/p>\n

Higher taxes on investment lowers productivity growth<\/strong><\/h5>\n

This is crucial for productivity growth since capital accumulation has historically driven growth.
\nIn a recently published paper for the Canadian Tax Journal<\/em> and Finances of the Nation<\/em>, researchers from the Centre for the Study of Living Standards, Andrew Sharpe and Tim Sargent, document that since 2000, approximately 90 percent of all labour productivity gains were from more capital available per worker.\u00a0
\nAny serious attempt to boost Canadian labour productivity must improve business investment incentives. Unfortunately, the coming federal tax changes will do precisely the opposite.
\nRather than reversing the 2018 tax changes, governments could enlarge them.
\nLook back at the graph above. Even the lower tax rates on investment in construction and trade are over 20 percent, and services are nearly as high.\u00a0
\nWe should adopt even more aggressive and expansive measures to lower those rates, as we\u2019ve done for manufacturing. Provinces too can help, with changes to both corporate taxes (where provinces operate their own) and sales taxes. British Columbia and Saskatchewan, for example, levy sales taxes on firm input purchases, which also lowers returns on investment.
\nGiven Canada\u2019s dismal growth in living standards and real incomes recently, getting the tax system right is critical. The budget has led many to focus on capital gains. But we shouldn\u2019t narrowly focus on just one tax change or another; the whole system of raising public funds in Canada needs a good, hard look.<\/p>\n","protected":false},"excerpt":{"rendered":"

The federal budget focused on increasing capital gains taxes to address generational fairness, but there are other tax changes coming that have been overlooked. One significant change is the increase in taxes on new business investment throughout the Canadian economy, which will lower investment and productivity. The temporary tax changes implemented in 2018 to allow faster write-offs for new investments are being phased out, leading to an increase in the effective tax rate on new investment in Canada. This will result in smaller investment returns and less capital for Canadian workers and businesses, ultimately lowering productivity growth. To boost productivity, it is suggested that governments should consider enlarging tax incentives for business investment rather than reversing the 2018 tax changes.<\/p>\n","protected":false},"author":6,"featured_media":12046,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"Default","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[1],"tags":[764,6393,3492,461,1766,186,913,6862,5907,3348,8454,33,5047,1625,4498,4919,3399,8099,260,26,1610,1873,5760,9545,8219,2110,415,3767,9092,7905,6861,2294,1823,2753,9120,3752,839,5527,387,9597,4434,8621,5957,4753,8257,6106,1824,1806,3480,1065,6860,4507,9076,3358,3607,4343,4556,5680,3912,5681,9212,1183,1006,841,8514,9812,4870,9204],"class_list":["post-12045","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-other","tag-agriculture","tag-analysis","tag-bill","tag-british","tag-budget","tag-business","tag-canada","tag-capital-gains","tag-capital-gains-taxes","tag-change","tag-columbia","tag-companies","tag-competitiveness","tag-construction","tag-corporate-tax","tag-corporate-tax-rate","tag-corporate-taxes","tag-credit","tag-dollar","tag-economy","tag-evidence","tag-fairness","tag-federal-budget","tag-federal-tax","tag-finances","tag-funds","tag-government","tag-growth","tag-higher-taxes","tag-impact","tag-incentives","tag-income","tag-increase","tag-investment","tag-investment-incentives","tag-investments","tag-labour","tag-loss","tag-lost","tag-move","tag-nelson","tag-new-business","tag-productivity","tag-project","tag-response","tag-sales","tag-sectors","tag-services","tag-spending","tag-tax","tag-tax-bill","tag-tax-changes","tag-tax-cut","tag-tax-cuts","tag-tax-incentives","tag-tax-increase","tag-tax-rate","tag-tax-rates","tag-tax-reform","tag-tax-system","tag-taxable-income","tag-taxes","tag-trade","tag-trump","tag-trump-tax-cuts","tag-u-s-economy","tag-wages","tag-workers"],"acf":{"keyphrase":"","keywords":"","sourceimg":"","country-category":""},"yoast_head":"\nCanada just started the largest tax increase you\u2019ve never heard of - 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