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If you think June 9 is too late for Tax Freedom Day, just wait

In 2017, the average Canadian family with two or more people will pay $47,135 in total taxes.

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Summary

  • In 2017, the average Canadian family will earn $108,674 in income and pay a total of $47,135 in taxes (43.4%).
  • If the average Canadian family had to pay its total tax bill of $47,135 up front, it would have worked until June 8 to pay the total tax bill imposed on them by all three levels of government (federal, provincial, and local).
  • This means that in 2017, the average Canadian family will celebrate Tax Freedom Day on June 9.
  • Tax Freedom Day in 2017 arrives one day later than in 2016, when it fell on June 8, because the average Canadian family’s total tax bill is expected to increase at a faster rate this year (2.4%) than the growth in income (2.2%).
  • Tax Freedom Day for each province varies according to the extent of the provincially levied tax burden. The earliest provincial Tax Freedom Day falls on May 21 in Alberta, while the latest falls on June 25 in Newfoundland & Labrador.
  • The Balanced Budget Tax Freedom Day for Canada arrives on June 18. Put differently, if governments had to increase taxes to balance their budgets instead of financing expenditures with deficits, Tax Freedom Day would arrive 9 days later.

Yes, Alberta’s tax advantage is gone

Alberta now has the 16th highest top personal income tax rate in North America.
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This paper examines the extent to which the tax policy changes introduced in Alberta in 2015 have diminished Alberta’s tax advantage relative to peer jurisdictions.

Specifically, we compare key tax rates in Alberta before and after the recent tax policy changes to assess whether Alberta still holds a significant tax advantage over other provinces and peer jurisdictions in the United States. We focus on three areas of tax policy that have historically composed the main pillars of Alberta’s “tax advantage”: personal income taxes, corporate income taxes, and sales taxes.

We find that whereas in each of these areas Alberta until quite recently enjoyed a substantial advantage over all Canadian provinces and most US energy states, that advantage has been substantially undermined or completely erased for two of the three pillars (personal income taxes and corporate income taxes).

Specific findings include:

  • Before the tax policy changes, Alberta had the lowest corporate tax rate in Canada. Alberta’s “advantage” in this area is gone. Alberta’s new provincial corporate tax rate is higher than British Columbia’s and Ontario’s, and is almost identical to those in Saskatchewan, Manitoba, and Quebec. Alberta can now be considered “middle of the pack” within Canada on corporate taxes.
  • In 2014, Alberta had the lowest top combined federal-provincial/state tax rate out of 60 Canadian provinces and American states. After the tax policy changes, Alberta’s top personal income tax rate is now the 46th lowest. That means Alberta’s top rate is now in the highest third of North American jurisdictions. Comparing the marginal personal income tax rate at four different income levels reveals that Alberta no longer has a distinct tax advantage in any of those levels examined.
  • Alberta retains one pillar of its tax advantage in the Canadian context, as it alone among the provinces does not have a provincial sales tax. Relative to American energy jurisdictions, however, Alberta does not necessarily enjoy a sales tax advantage as there are several states with neither a federal nor a state-level sales tax.

We conclude that the notion of a uniquely competitive and pro-growth tax regime that provides the province’s economy a distinct advantage is largely obsolete.

This development has important implications for Alberta’s future economic growth prospects. To provide context for these implications, this paper briefly discusses the research literature on the relationship between tax rates and economic growth, as well as the evidence surrounding the economic impact of different types of taxes.

The literature suggests low and competitive tax rates are generally beneficial for economic growth, particularly with respect to corporate income taxes and personal income taxes. We demonstrate that Alberta’s experience is consistent with this evidence, by providing an analysis of the province’s economic performance during the life of the province’s “tax advantage.” This analysis shows that generally, the province economically outperformed the rest of the country and most peer jurisdictions during that time. For example, Alberta’s real GDP growth rate between 2001 and 2014 (at 3.3%) was higher than all other provinces and behind only North Dakota among US energy states.

In a discussion section, the paper also considers the fiscal context in which recent tax policy questions were made, assessing the extent to which they were necessitated by the emergence of large budget deficits. We find that the provincial government had other options available to it to shrink the province’s deficit, such as reducing and reforming provincial expenditures, which have increased rapidly in recent years. This approach would have preserved Alberta’s tax advantage, and economic theory suggests it would have been beneficial for the province’s short- and long-term economic growth prospects relative to the course the government has in fact taken.
 
In short, the erosion of Alberta’s tax advantage documented here should be viewed as the result of discretionary policy choices rather than a necessity imposed upon the government by fiscal circumstances. As a result of these choices, we conclude that the Alberta tax advantage has been, in large measure, erased.

‘Anti-tax’ accusation is simply wrong

Once government spending surpasses 30 per cent of GDP, economic growth declines.
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In 2016, the average Canadian family will earn $105,236 in income and pay a total of $45,167 in taxes (42.9%).

If the average Canadian family had to pay its total tax bill of $45,167 up front, it would have worked until June 6 to pay the total tax bill imposed on it by all three levels of government (federal, provincial, and local).

This means that in 2016, the average Canadian family will celebrate Tax Freedom Day on June 7.

While Tax Freedom Day in 2016 arrives two days earlier than in 2015, when it fell on June 9, there is little to cheer about as the earlier date is not the result of any major tax reductions by Canadian governments. Rather, it is the result of the leap year in 2016, conservative government projections of tax revenues, and weak economies in some provinces.

Tax Freedom Day for each province varies according to the extent of the provincially levied tax burden. The earliest provincial Tax Freedom Day falls on May 17 in Alberta, while the latest falls on June 14 in Newfoundland & Labrador.

The Balanced Budget Tax Freedom Day for Canada arrives on June 18. Put differently, if governments had to increase taxes to balance their budgets instead of financing expenditures with deficits, Tax Freedom Day would arrive 11 days later.

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On Tax Freedom Day, the average Canadian family has earned enough money to pay the taxes imposed on it by the three levels of government: federal, provincial, and local. In 2015, Canadians celebrate Tax Freedom Day on June 10. That is, Canadians will have worked until June 9 to pay the total tax bill imposed on them by all levels of government.

Tax Freedom Day in 2015 arrives one day later than in 2014, when it fell on June 9, because the average Canadian family’s total tax bill is expected to increase at a faster rate this year (3.1%) than the growth in income (2.1%). Governments across the country are partly to blame since many have raised taxes this year.

In 2015, seven provincial governments expect to run budget deficits. Had Canadian governments increased taxes even more to balance their budgets, the average Canadian family would have worked until June 13 to pay the tax bill. In other words, the Balanced Budget Tax Freedom Day arrives on June 14, four days later than Tax Freedom Day. In 2015, the average Canadian family will earn $102,874 in income and pay a total of $44,980 in taxes (43.7%).

Tax Freedom Day for each province varies according to the extent of the provincially levied tax burden. The earliest provincial Tax Freedom Day falls on May 19 in Alberta, while the latest falls on June 21 in Newfoundland & Labrador.

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