Tegan Hill and Jason Clemens are analysts at the Fraser Institute.
The Australian government recently passed tax cuts worth roughly $145-billion. The Aussies say the cuts are necessary to stay competitive with other countries and boost their economy. It’s yet another example of a key competitor introducing tax relief while Canada does the opposite, falling further behind.
By 2022-23, Australia’s multiyear tax plan will cut personal income taxes for low- and middle-income earners by raising the income threshold at which the middle-income tax rate applies, from 41,000 Australian dollars to 45,000 Australian dollars, meaning more Australian income will be taxed at the lowest rate (19 per cent). By 2024-25, the plan will lower the middle-income tax rate from 32.5 per cent to 30 per cent.
These changes boost previous tax cuts passed in 2018, which lowered the income tax rate for many middle-income earners from 37 per cent to 32.5 per cent, increased the middle-income tax threshold from 37,000 Australian dollars to 41,000 Australian dollars, and flattened the middle-income tax threshold to a single income bracket.
While the top tax rate in Australia remains at 45 per cent, due to the tax cuts, more of an individual’s income will be taxed at a lower tax rate. (Unlike in Canada, Australia’s provinces do not impose personal income taxes.)
In other words, the government simplified Australia’s personal-income-tax system and made it more competitive. The lower, flatter personal income taxes in Australia make it more attractive to entrepreneurs, business owners, professionals and skilled workers.
Meanwhile in Canada, governments have added tax brackets and raised tax rates. For example, since 2015, the federal Liberal government has raised the income-tax rate on entrepreneurs, professionals and business owners from 29 per cent to 33 per cent by creating a new tax rate for Canadians earning more than $200,000. Many provincial governments, including Alberta and Ontario, have also increased personal income-tax rates.
Even if we compare Canada’s most tax competitive provinces, Australia outperforms us. Saskatchewan’s 47.5-per-cent top personal-income-tax rate (combined federal and provincial), the lowest in the country, is still higher than Australia’s (45 per cent). The highest taxed provinces − Ontario at 53.5 per cent, Nova Scotia at 54.0 per cent − face rates almost 20 per cent higher than in Australia.
Canada’s uncompetitive tax regime, which is compounded by our increasingly complex and uncompetitive regulations, damage our investment climate. A recent Fraser Institute study showed that between 2013 and 2017, the amount invested outside of Canada by Canadians increased by 74 per cent while the amount of investment in Canada by foreigners declined by 55 per cent. Clearly, it’s becoming less attractive to invest in Canada.
And this is not just an oil and gas issue. Another recent analysis showed that investment in 10 of 15 economic sectors of Canada’s economy declined since 2014. And a 2017 study that included Canada-Australia comparisons showed that business investment (as a share of the economy) was 44 per cent higher in Australia compared with Canada between 2015 and 2017. Private-sector investment is key to economic prosperity and the declines in Canada should be worrying.
Finally, compared with Canada, Australia maintains a markedly smaller and more efficient government sector. In 2018, Australia’s governments − federal, provincial and local − consumed 35.5 per cent of the national economy compared with 40.6 per cent in Canada. Australians still have access to comparable public services such as universal health care and K-12 education, but with a lower tax burden − and lower personal income-tax rates.
In Canada, policy-makers should take note of Australia’s commitment to competitiveness and efficient government, for the benefit of Canadians and their families.