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Performance Indicator 6: Tax Rate

Where BC Ranks, Provincial Comparison

Year

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Rank

10

9

9

6

3

2

2

2

2

2

Performance Indicator Six follows the combined federal-provincial tax rate on the highest income bracket.

BC's top marginal personal tax rate was the second lowest among the provinces in 2007, the same rank it has held since 2002. Nova Scotia had the highest rate, and the lowest rank in 2007.

Alberta had the lowest rate and earned the top rank over the 1998 to 2007 analysis period.






Why It's Important
The top marginal (combined federal and provincial) income tax rate is a key factor in a jurisdiction's ability to attract and retain highly skilled workers and leading innovators. High marginal tax rates tend to discourage additional work effort and lessen the growth of real GDP. The top marginal personal income tax rate is the combined federalprovincial income tax rate levied on the highest income bracket. The top rate takes effect at various income thresholds as noted in the box below.

Federal and Provincial Top Marginal Tax Rates and Income Thresholds for Individuals - 2007
  BC AB SK MB ON* QC** NB NS* PE* NL* Federal
Tax Rate(%) 14.70 10.00 15.00 17.40 17.41 19.22 17.95 19.25 18.37 18.07 29.00
Income Bracket $95,910
and
over		 All income $109,730
and
over		 $65,001
and
over		 $70,977
and
over		 $58,596
and
over		 $111,162
and
over		 $93,001
and
over		 $62,740
and
over		 $59,733
and
over		 $120,888
and
over
Notes: * Ontario, Nova Scotia, Prince Edward Island and Newfoundland and Labrador levy surtaxes in their personal income tax systems; the income brackets shown are those that apply to the top statutory rates.
**The abatement of basic federal tax is incorporated.
Source: KPMG

North American Comparison

Seven states levy no personal tax so the top marginal rate in these jurisdictions is the federal rate of 35 percent. This is below Alberta's 39 percent.

British Columbia's top marginal rate is slightly below the states identified as having the highest personal income tax burden. In general, combined federal-provincial rates are higher than the combined federal-state rates south of the border.

Note
A North American rank is not practical for this indicator because of the difficulties in comparing tax systems for all the states to those in the provinces.

Business Tax Competitiveness

As the economy becomes increasingly global and reaps the benefits of continual technology advances, physical location becomes less important. A brief examination of some of the world's top economic growth performers (Hong Kong, Korea, Singapore and Ireland) illustrates that BC and Canada share many of the ingredients of these jurisdictions' success: a highly educated population, advanced transportation and communications infrastructures, and export-oriented production.

The only key difference appears to be effective tax rates that are far above those of competing jurisdictions.

While British Columbia's and Canada's corporate tax rates appear competitive with other global jurisdictions in analyses which use simple statutory corporate income tax rates, this does not always present a true picture of the real costs investors face; a variety of other taxes and tax related factors combine to influence the effective tax rate investors pay. Capital taxes, sales and excise taxes, inventory and depreciation deductions, and personal and investment taxes all affect the rate of return that a business receives on its investment.

It is this expected rate of return that any potential investor will use in comparisons with other jurisdictions. By limiting investor returns, high effective tax rates reduce the likelihood of investments in productivity enhancing capital projects and new technologies that could otherwise serve to raise wages and increase standards of living.

Canada had the 11th highest effective tax rate among eighty countries in 2007. Canada's rate, 30.9 percent is lower than the size-weighted average effective tax rate on capital across all eighty countries.

Canada's rate is down from a sixth highest rate of 36.6 percent in 2006. The federal tax cuts announced in the fall of 2007 will help to further reduce rates. The announced goal of a 25 percent statutory rate, consisting of a 15 percent federal rate and a common 10 percent provincial rate, is a good target in today's environment. However, it may be inadequate by 2012, the target date, as other countries continue to cut taxes.

A comparison of effective tax rates shows that BC had the third highest rate among the provinces in 2007 with a rate 8.6 percentage points above Alberta, but 5.4 percentage points below Ontario.

Sources

Jack M. Mintz, The 2007 Tax Competitiveness Report: A Call for Comprehensive Tax Reform;

Duanjie Chen, Jack Mintz and Andrey Tarasov, Federal and Provincial Tax Reforms: Let's Get Back on Track.

Competitive tax rates and fiscal policies are a key factor found in Canada's most successful competitors. Tax rates are not the whole story as companies also look for a number of other factors including a skilled and educated labour-force, efficient infrastructure, easy access to services inputs and transportation routes.

British Columbia has made progress, but must continue its efforts to be both a less expensive place to do business, as well as being a better place to do business.

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