Notley government’s corporate tax hike chips away at Albertan wages

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Appeared in the Edmonton Sun, May 17, 2017
Notley government’s corporate tax hike

Since taking office, the Notley government has unleashed a raft of tax increases including a significant hike to the province’s corporate income tax rate. While there’s a misperception that higher corporate taxes do not affect average families, in reality they’re ultimately paid for by ordinary Albertans, in part through lower wages.

This may sound counter-intuitive, so let’s explain.

Higher corporate taxes in a trade-oriented economy discourage investment. But when businesses invest in machinery, equipment and technology, workers are able to produce more and create higher-valued output for each hour they work, increasing their productivity. Because increased productivity leads to higher wages, and higher corporate taxes stifle productivity, corporate tax hikes, in the end, hurt workers.

A recent study published by the University of Calgary provides new Canadian evidence of this reality. It found, among other things, that every dollar in extra tax revenue generated by higher corporate taxes decreased long-run aggregate wages in Alberta by $1.52. The same study estimates that the Notley government’s two percentage point increase in the corporate income tax will reduce labour earnings for a typical two-earner household in Alberta by approximately $830 per year.

At a time when many Albertan families struggle with weaker income growth due to the recession, the last thing they need is further economic heartache driven by their own government.

The University of Calgary analysis corroborates the results of a recent Fraser Institute study, which found that a one percentage point increase in the average provincial-federal corporate income tax rate would lead to the average Canadian worker losing between $254 and $390 in annual wages. Keep in mind Alberta’s corporate income tax rate increased by two points, so the estimated negative effect on wages is double—up to $780.

While the Notley government’s corporate tax hike will undoubtedly hurt Albertans, a potential U.S. corporate tax cut would be salt in the wound, as it would undermine the province’s tax competitiveness. Though it isn’t clear what will come of the Trump administration’s tax plan, the proposed reduction of the average federal-state corporate tax rate, from roughly 39 per cent to 21 per cent, would reduce Alberta’s competitiveness relative to competing jurisdictions in the U.S., namely energy-intensive states such as Texas.

While a corporate tax cut south of the border would make the need for tax changes in Alberta more urgent due to competitive pressures, the economic case for a corporate tax cut in Alberta holds regardless of policy developments in the U.S.

Corporate taxes are among the most economically harmful types of taxes in terms of the deleterious effects on overall economic output and incomes. And as noted, the evidence shows they chip away at the wages of average workers.

Regardless of what happens stateside, the case for lowering corporate taxes in Alberta is strong as it would boost economic growth and the wages for average Albertans.