Lack of growth, not inequality, is Alberta’s biggest problem
In her year-end news conference, Alberta Premier Rachel Notley argued that eliminating Alberta’s single-rate personal income tax was essential to combat inequality. This statement belies curiously misplaced priorities. With the provincial unemployment rate at nine per cent, promoting economic growth and job-creation should be the key objective of tax policy. Unfortunately, the tax increases the premier is defending are detrimental to economic growth.
Premier Notley’s opposition to the single-rate personal income tax is premised on the notion that it was “regressive.” In other words, she’s arguing that it led to a higher tax burden for lower income residents than higher income residents. That is not a fair representation, since the single rate was paired with the highest personal exemption rate in the country. That meant that lower-income Albertans paid income tax on a far smaller share of their income than higher income Albertans. It also means that in many cases, low-income Albertans paid less income tax than individuals with similar incomes in any other province.
The problem with the personal income tax (PIT) increases is that they will reduce overall economic growth. This is especially problematic given the economic headwinds facing the province, where unemployment has reached nine per cent. Policies that reduce growth can choke-off employment opportunities that are desperately needed in Alberta.
There are two reasons that the government’s PIT increases will reduce growth. The first reason is that tax increases, generally speaking, reduce economic growth rates. There’s a litany of academic research demonstrating this point. For instance, a 2010 article in the American Economic Review by Romer and Romer examined the relationship between economic growth and the overall level of taxation in the United States between 1945 and 2007. The authors estimated that increasing taxes by one per cent of GDP would decrease real GDP by 2.5 to 3 per cent.
The second reason is that personal income taxes are a particularly economically harmful tax to increase. Not all taxes are equal, in terms of the economic distortion and damage they cause. Some are worse than others, and high personal income tax rates have been clearly demonstrated to be economically harmful. The reality is higher income taxes create disincentives for hard work and entrepreneurship, two important drivers of growth.
But the PIT isn’t the only area where Alberta’s government has introduced tax hikes that are harmful to growth—the recent increase in the corporate income tax has also harmed the province’s growth prospects. As harmful to economic growth personal income tax increases are, corporate income tax (CIT) increases are even worse. In an aptly titled 2016 study, The Costliest Tax of All, Canadian economists Ferede and Dahlby analyzed data from Canadian provinces between 1972 and 2010 to estimate the cost of various categories of taxes to the economy. The study buttressed the usual finding that corporate income taxes are generally more harmful than personal income taxes, and that personal income taxes are generally more harmful than sales taxes. Indeed, the authors concluded that in many cases corporate income tax increases in Canadian provinces have caused so much economic damage that they actually reduced government revenue.
Some argue for corporate tax increases as a way of promoting fairness by taxing “the rich.” This line of argument betrays a misunderstanding about who bears the burden of corporate taxes. Research has also shown that a portion of corporate tax increases are passed on to employees in the form of lower wages and benefits. That’s the last thing Albertans needed during this recession.
Among Alberta’s core economic challenges are high unemployment and a sharp fall in economic output. Getting Albertans back to work should be the top priority right now. Unfortunately, corporate and personal income tax increases have made these problems worse rather than better.