If Premier Wynne wants to boost low-wage worker pay, she should cut Ontario’s corporate tax rate
The flaws in Ontario Premier Kathleen Wynne’s plan to raise the pay of low-wage workers are quickly becoming apparent. On Jan. 1, the Wynne government increased Ontario’s minimum wage sharply by 21 per cent and it immediately backfired on low-wage workers in a number of ways.
In stark contrast, over the past month several companies in the United States have announced plans to augment the pay, benefits and training of their employees—without any government mandate. For instance, Walmart recently made headlines with its announcement to voluntarily increase wages and benefits for its low-wage workers. The retail giant is setting its minimum wage to $11 per hour (up from $10) and expanding parental benefits. On top of this, Walmart is paying a one-time bonus to employees of up to $1,000.
What’s driving the decision of Walmart and other companies to increase employee pay in the U.S.?
In short, major tax reform including a large cut to the U.S. federal corporate tax rate from 35 per cent to 21 per cent, among other important tax changes that will dramatically improve the competitiveness of the American business tax regime.
But this really shouldn’t come as a surprise. Both evidence and economic theory clearly point to the failings of minimum wage hikes and the potential for corporate tax cuts to improve the pay of ordinary workers.
Indeed, the negative consequences of the minimum wage increase are entirely predictable. With a minimum wage hike, the government mandates a higher price for low-skilled labour (often teenagers or youth), without a commensurate increase in worker productivity. Just as most people tend to purchase less of a good or service when prices goes up with no quality improvement, businesses tend to purchase less low-wage labour after a minimum wage increase. And that is not just theory—there are multiple Canadian academic studies that consistently show this with past minimum wage increases.
On the other hand, reducing corporate taxes can actually benefit workers by increasing wages and benefits. Research finds that workers effectively bear a large brunt of corporate taxes as higher rates lead to lower wages. This is because in the short-term businesses pass on part of the cost of increased corporate taxes onto their workers. In the longer-term, higher corporate taxes lead to less investment, which ultimately hinders the ability of workers to be more productive and garner higher wages.
If Premier Wynne genuinely wants to use government policy to increase the pay and prosperity of Ontario workers, then cutting the provincial corporate tax rate is one way to do it.