Personal Taxes

Jack M. Mintz: To kill innovation, elevate personal taxes

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We could drive some of our brightest stars to other countries. We are losing their expertise and our governments are losing their taxes

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Jack M. Mintz The top 10 percent of Canadian taxpayers pay nearly 60 percent of personal income taxes. The top 10 percent of Canadian taxpayers pay nearly 60 percent of personal income taxes. Photo by Brent Lewin / Bloomberg Files

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Cities worry about their ability to attract innovators. You must: your growth depends on it. A recent study showing that Canada’s city rankings in a global innovation index fell dramatically in 2020 will pause many local politicians. The index compiled by Australian think tank 2thinknow shows Canada’s top-ranked city of Toronto, which fell 33 places from 9th to 43rd in 2019, while Montreal dropped 22 places from 31st to 53rd. Tokyo ranked highest overall, while the United States claimed a third of the 100 most innovative cities. After the US, Australia, the home of the think tank, had the second most cities in the top 100 – six – better than Germany or Japan and far better than both Canada’s.

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Like ESG rankings I wrote about last week, these results should be treated with a healthy amount of skepticism. The data-analytical study using 162 indicators provides values ​​between 44 and 56 for the top 100 cities. Therefore, the differences between each city’s scores are very small, less than an eighth of a point on average. And the rankings are very unstable, with very large shifts in just two years. (Augusta, Georgia moved up 180 places). In reality, a city’s ability to innovate is unlikely to change that quickly.

As a tax professional, I was surprised to see that the people who made the index only considered corporate tax rate and sales tax rate in their 162 indicators. Corporate tax incentives and other business taxes should certainly be important in attracting innovative businesses, but sales taxes shouldn’t be so much. They are likely to reduce corporate revenues, but their real economic costs are very likely to be borne by consumers.

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Personal taxes are not included at all, but if there is one tax variable that innovators call important to competitiveness, it is personal income tax. In a 2016 American Economic Review study in eight OECD countries, three economists examined the impact of personal tax rates on “superstar inventors” – those with the most and best patents. They estimated that a 10 percent increase in the income tax rate – the upper limit tax rate from 50 to 55 percent, for example – would lead to a 10 percent decrease in inventor immigration. In a 2018 study, the authors estimate that superstars have an even stronger reaction to the personal tax differences in the US states: a 16 percent decrease in immigration with a 10 percent increase in personal taxes.

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Fear of brain drain has led some high-tax countries, including Quebec, to lower their personal taxes to attract inventors, sports stars or researchers. Denmark started this trend in 1992 by introducing a reduced income tax rate for foreign residents and academics with incomes above a monthly threshold. The rate is currently 32.84 percent for a monthly salary of about 13,900 CAD, compared to a top rate for all other Danes of 55.3 percent.

A 2014 study published in the Quarterly Journal of Economics examined the impact of the Danish reform on immigration after 1992. It found that immigration of foreigners entitled to personal tax breaks increased by 200 percent by 2005, while the other immigration only increased by about two. One-third. This suggests that jurisdictions can successfully attract superstars with personal tax breaks.

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Canadian governments need to give more thought to the personal tax effects on professional mobility. The top 10 percent of Canadian taxpayers pay nearly 60 percent of personal income taxes. Now that we have the highest personal tax rates at the Danish level (53.5 percent in Ontario, for example), we can move some of our brightest stars to other countries. We are losing their expertise and our governments are losing their taxes.

It is difficult to say how much this will affect our innovation balance sheet. But two trends are worth mentioning. The first is the noticeable decline in the number of researchers relative to employment in Canada after 2014. According to OECD statistics, Canada’s researchers peaked at 9.1 per 1,000 employees in 2008 and have since fallen to 8.5 in 2018 Canada was above US levels from 2005 to 2014, a time when federal and provincial governments cut our top tax rates for individuals, from 2015 we fell behind the US as governments once again raised top tax rates for individuals well above the level US level.

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The loss of researchers also correlates with the loss of research and development intensity. Canada’s R&D spending as a percentage of GDP fell from 2 percent of GDP in 2005 to 1.5 percent in 2019. Corporate R&D also fell sharply, from 1.1 to 0.8 percent of GDP. Over the same period, U.S. R&D spending soared from 2.5 percent of GDP by 2019 to a staggering 3.1 percent of GDP, double that of Canada. If we continue this failed record in the years to come, Canada will continue to lag behind the US and other developed economies in income growth.

We’ll soon hear from the NDP and the Liberals that we can raise taxes on the high end to fund social programs for everyone else. Canadians should be cautious about free lunch offers: We collect taxes on inventors and other professionals at our own risk.

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