Canada should reform its tax policy to attract more capital investment and boost productivity according to a new report released today by the C.D. Howe Institute.

In the report, authors William Robson and Danielle Goldfarb say that investment per worker in the U.S. is currently more than $2,000 higher than per-worker investment in Canada.

They note that although Alberta and several Atlantic provinces have experienced robust business investment since the mid-1990s relative to the United States and other OECD countries, other provinces and Canada as a whole fared less well.

Some of the differences in levels of investment reflect differences in industrial structure from province to province, they say. “Resource industries are capital intensive, leading to relatively high capital spending per worker in Alberta, for example, when demand for natural resources is strong. Ups and downs in the automotive market will show up disproportionately in Ontario’s performance.”

“Contemplation of the widening circle of countries that are attractive to investment around the world, however, shows that industrial structure is not fixed. Over time, the policy environment does matter,” they argue. “Natural resources attract investment readily where tax rates are low and rights of investors are secure; they remain unexploited where taxes are high and rights are insecure.”

The authors argue “that such strength as there is in Canada’s national figures owes much to the only one of the larger provinces, Alberta, that is performing relatively well.” They add, however, that “factors that might improve the performance of many provinces, and of the country as a whole, are relatively easy to identify.”

One such factory, the authors suggest, is the taxation of capital investments. It says that research suggests that many of the provinces that have been losing investment share recently have effective marginal tax rates on new capital investment of 30% or more.

“The potential lift that more robust investment can give living standards warrants greater effort on the part of Ottawa and the provinces to improve the climate for business investment,” they conclude.