Investors follow returns. When productivity lags and taxes bite, money finds a better home

Canada is sliding into economic decline, and the warning signs are no longer subtle.

Productivity growth lags other G7 countries. Business investment and research spending trail other major economies. Entrepreneurs and startups are increasingly looking to jurisdictions outside of Canada for growth. The effects are visible in weaker income gains, widening investment gaps and mounting deficits.

When countries fall behind in productivity, they lose economic strength, fiscal flexibility and national influence. Productivity does not weaken by accident. It is reflected in the incentives governments create, particularly around work, investment and reinvestment.

The tax system is not the only cause of the decline in productivity, but how Canada taxes income and investment is central to it because it shapes incentives across every sector of the economy.

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According to Statistics Canada, Canada’s labour productivity growth has trailed the United States and many other advanced economies for much of the past decade. That gap shows up in weaker income gains over time. For Canadian families, that means slower wage growth, fewer high-paying job opportunities and less room for governments to improve the services people rely on. It also reduces the government’s ability to fund services such as health care, defence and infrastructure.

Research from the OECD and other international bodies consistently finds that corporate income taxes and high marginal personal income taxes are among the most economically distortive forms of taxation because they directly affect decisions to invest, hire and expand. When after-tax returns fall,........

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