The document, in clarifying the relationship between an aging society, economic growth, and the appearance of new startups, signals that reform to capital gains tax could help give entrepreneurial activity by older individuals and the young a new lease of life.
“A great deal has been written about the positive link between entrepreneurship and economic growth. What’s being ignored, however, is the increasing evidence of a relationship between entrepreneurship and age,” said Jason Clemens, vice president of the the Vancouver-based policy institute.
— The Fraser Institute (@FraserInstitute) April 15, 2015
The report’s authors — including Fraser Institute President Niels Vedhuis, Clemens, and Joel Emes, a former senior advisor to British Columbia’s provincial government — work from the starting point that business activity depends on two factors: the accumulation of capital and creativity.
The study shows that that while Canada’s population grew 15 percent between 2004 and 2012, business activity fell by 16.2 percent in the same lapse of time. In a worrying signal of what’s to come, the statistics suggest that by 2035 almost one Canadian in four will be over 65.
“Put another way, the share of the Canadian population over the age of 65 is expected to increase by 74.1 percent between 2008 and 2035. So the proportion of Canadians over age 65 will continue to grow while the proportion of younger, working age people will continue to shrink,” the report indicates.
The effect of an aging population on government institutions through increased social spending, for example, is well known. However, the authors note that the relationship between age and business creation has received markedly little attention.
The accompanying press release issued by the Fraser Institute remarks that younger populations tend to involve themselves more in entrepreneurial activity, given that they’re prepared to take greater risks and show greater enthusiasm for investing in new technologies or markets.
“The problem is not unique to Canada. The phenomena of aging populations and dropping rates of business startups has also been documented in other industrialized countries such as the United States,” Veldhuis explains.
The policy institute argues that this situation will only worsen, as an increasingly aging population create fewer new businesses, and thus productivity and job creation are diminished.
Another finding of the study is that as the number of new companies diminishes, the size and workforce of existing firms is boosted.
Lifting the Burden in Canada
While they report that there are various ways of reverting the tendency for greater age to bring diminished productivity, the study’s authors propose revising Canada’s sales tax on goods.
Among several possible reforms mentioned are the complete elimination of the tax, as is the case in 11 of the 34 nations that make up the OECD, or differing the application of the same among different groups, as done in the United States.
Clemens explains that if the Canadian government wants to encourage entrepreneurial activity, a good first step is to reform the current tax regime.
“Capital gains taxes raise only a small amount of revenue for the government but that comes at a considerable economic cost,” he writes, “in that they reduce the return entrepreneurs receive from the sale of a business and impede small business finance, thus discouraging business startups.”
The Washington-based research institute also found in 2015’s Index that Canada is the second best country in the world for respecting property rights, and boasts a particularly stable climate for doing business.