MONTREAL – A recent study conducted by the Montreal Economic Institute (MEI) sheds light on how income tax increases implemented since 2015 have had a substantial impact on the formation of new businesses.
The study, released this morning, suggests that these tax hikes have deterred thousands of potential entrepreneurs from pursuing their business ventures.
Emmanuelle B. Faubert, an economist at the MEI and the author of the study, explains, “The more the government increases tax rates, the less financial resources individuals have at their disposal to fund their entrepreneurial initiatives. As a result, thousands of aspiring entrepreneurs are forced to postpone their business endeavours, adversely affecting employment, innovation, and productivity.”
The study elaborates that for every one-percentage-point increase in the top marginal income tax rate, the business entry rate decreases by 0.21 percentage points. Nationally, this translates to a reduction of 2,455 new businesses for each percentage point of tax increase.
Cumulatively, the federal and provincial tax rate adjustments introduced since 2015 have reportedly thwarted the establishment of an estimated 12,195 businesses, based on calculations by the study’s author.
Faubert says the decision by the Trudeau government to raise the top marginal income tax rate by four percentage points in 2015 alone resulted in the potential loss of 9,820 Canadian businesses.
In the current year, the federal government anticipates collecting approximately $2.88 billion in revenue from the increased top income tax rate.
Faubert points out that this amount is roughly equivalent to the production subsidies pledged to Volkswagen and Stellantis by the federal and Ontario governments, amounting to approximately $2.82 billion per year over 10 years.
According to Faubert, “With the same financial resources used for subsidizing two corporations, Ottawa could have witnessed the emergence of 9,820 additional job creators if it had simply left the money in the hands of taxpayers. When faced with the choice between attracting two large companies or fostering the creation of 9,820 more startups, the decision should be a straightforward one.”
The study’s findings, says Faubert, underscore the significant influence of income tax rates on entrepreneurial activity and highlight the potential consequences of such tax policies on economic growth and job creation.
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