Tax Reform to Raise Canada’s Pitiful Productivity

Stagnant productivity growth is putting Canada’s long-term economic prosperity and standard of living at risk. Labour productivity growth — measured as output per hour worked — has steadily declined in Canada over recent decades, falling from an average annual growth rate of 1.74 per cent (1973–2000) to just 0.87 per cent in the past 20 years. This trend places Canada well below its peers in the Organisation for Economic Co-operation and Development (OECD), with our country ranking 28th out of 38 member nations in productivity growth from 2000 to 2022. Comparisons with the United States alone are even more troubling; Canada’s business sector productivity, which surpassed 90 per cent of the U.S. level in the mid-1980s, had dropped to a postwar low of 69 per cent by 2021.

Driving this slump are declining multifactor productivity (MFP), weak investment in machinery, equipment and intellectual property and slowing improvements in labour quality. The level of MFP, which reflects the combined efficiency of capital and labour, has declined since 2000, while capital intensity and innovation investments have fallen well below U.S. levels. For example, Canadian R&D investment was just 1.81 per cent of GDP in 2022, well below the G7 average and half of the U.S. rate.

Strategic tax reforms could address many of these issues by creating stronger incentives to work, invest, train and innovate. A shift in the tax mix — moving away from personal and corporate income taxes toward broader-based consumption taxes like the GST — offers a path to stimulate productivity-enhancing behaviour while maintaining fiscal responsibility. Research shows that corporate and personal income taxes are more damaging to growth than consumption or property taxes, which do not distort economic decisions to the same extent.