Canada would be better off if Ottawa stopped hamstringing entrepreneurship in the country
By Emmanuelle Faubert
and Gabriel Giguère
Ever since the federal government signalled an open bar for subsidies for the electric vehicle industry, the list of companies wanting to set up shop in this country in exchange for a few wheelbarrows full of taxpayer cash just keeps growing.
If the past is any guide, there’s a good chance Ottawa will also give them a substantial amount of hard-working Canadian taxpayers’ money.
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It’s not unusual for companies to ask for money, of course. However, the government must begin evaluating the rationale behind these subsidies, particularly when the Parliamentary Budget Officer questions their underlying assumptions.
Furthermore, what’s missing from the government’s considerations is the economic issue of opportunity cost. In simpler terms, if the government chose not to allocate these funds to large-scale subsidies but instead allowed taxpayers to retain them, what would be the economic impact, and how would this compare to these expenditures’ anticipated effects? In most cases, it’s better to leave money in taxpayers’ pockets than to use rather than to use it to attract large corporations.
For example, let’s examine the subsidies already allocated to EV battery plant projects in Canada.
After Volkswagen was promised $13.2 billion of production subsidies, Stellantis was next in line, securing $15 billion in financial support. This trend continued when Swedish manufacturer Northvolt obtained its share, resulting in a total allocation of $32.8 billion in public funds.
Those subsidies alone represent over $3 billion a year for several years. To put this enormous sum in perspective, it is larger than the additional revenues generated from the new tax bracket introduced by the Trudeau government, which amounts to $2.88 billion a year.
This increase in the tax burden had harmful consequences for Canadian entrepreneurship. Ultimately, a person who is more heavily taxed has less money with which to start a business. Indeed, the economic literature finds a clear link between an increased tax burden and slower business creation in Canada.
The 2016 increase kept many entrepreneurs from starting a business. If not for that increase, some 9,820 Canadian companies could have been launched between 2016 and 2020, thus contributing to the country’s prosperity.
But instead of following this path, the government preferred to tax Canadians more and subsidize foreign multinationals. Of course, when governments opt to take more money out of taxpayers’ pockets, they also have fewer financial resources to devote to things like groceries, car payments, and savings.
This kind of decision has negative effects on self-employed workers, too. If it’s harder to accumulate the funds necessary to start your own business, it’s also harder to accumulate the funds required to create the cushion one needs while they’re looking for contracts as an independent worker.
Given the diminishing number of startups since the start of the pandemic, now lower by 150,000 across the country, it is clear that entrepreneurs need help more than the major multinational corporations involved in battery and electric vehicle manufacturing plants.
These thousands of businesses would certainly have created value for the population as a whole, with no need for the government to decide, through the tax system, how Canadians should spend their own money.
The Canadian economy and the prosperity of the population do not depend on the number of EV battery plants there are, but rather on the success of all sectors of the economy and all economic actors, from the corner garage to the big Bay Street bank.
Canada will be better off when Ottawa understands that its role is not that of a venture capitalist, nor is it to tax us so heavily that it hinders entrepreneurship in the country.
Emmanuelle B. Faubert is an economist and Gabriel Giguère is a public policy analyst with the Montreal Economic Institute.
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