A new C.D. Howe Institute report, which scores the tax system of 81 developed and developing countries according to their tax treatment of business investment, finds that highly taxed Canada ranks a disappointing eighth while the investment-hostile Republic of Congo ranks first.

The publication of The 2006 Tax Competitiveness Report — which was prepared by Jack M. Mintz, professor of business economics at the Rotman School of Management, University of Toronto, and fellow-in-residence at the institute — marks the 89th anniversary of Canada’s passage of the Income War Tax Act that introduced the income tax.

Mintz points out in the report that even though the federal and provincial governments have recently made progress in reducing marginal income tax rates, the pace of tax reform has been slow compared to some other developed countries, like Australia, Finland, Ireland and the Netherlands.

Canada’ productivity growth also has been slow, as has income growth. In the years to come, achieving better growth may pose stiff challenges, as population aging begins to pinch labour markets, making capital investment all the more important. Low business investment restrains growth, and makes it more difficult to innovate, create better-paying jobs or provide the resources needed to support retirement.

When it comes to promoting growth, says the study, Canada will need to pay attention to its tax on work, saving and investment. The report proposes a pro-growth tax reform plan that, among other important changes, would lower claw back rates for income-tested benefits, increase limits for contributions to pension and RRSP plans, increase tuition tax credits, reduce federal corporate income tax rates from 19% to 15% by 2010, and improve the tax treatment of foreign investors.