Alberta Premier Rachel Notley recently claimed that 2016 was a good year for her government. For Albertans, however, it was another very difficult year. Aside from the approval of two crucial pipeline projects, Albertans haven’t had much to celebrate.
The economy is no longer in free fall, but with the unemployment rate at nine percent and projected to remain above eight percent for the duration of 2017, the reality is that many Albertans are hurting.
It wouldn’t be fair to blame the government entirely for Alberta’s economic troubles. There are forces beyond the government’s control that influence economic growth rates and labour market performance. But the government in Edmonton does have policy levers that it can pull. Unfortunately, it has pushed them in the wrong direction.
For instance, consider the decision to abandon the single-rate personal income tax (PIT) system. This year was the first full year under the new five-bracket system, with a top marginal rate 50 percent higher than it was at the beginning of 2015. This change in Alberta tax policy has almost certainly undermined the provincial economy.
There are two reasons that the government’s PIT increases are harmful to economic 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 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 percent of GDP would decrease real GDP by 2.5 to three percent.
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 increase in the corporate income tax rate that took effect last year has also harmed the province’s growth prospects.
As harmful to economic growth as personal income tax increases are, corporate income tax (CIT) increases are even worse. In a 2016 study, The Costliest Tax of All, Canadian economists Ergete Ferede and Bev Dahlby analyzed data from Canadian provinces between 1972 and 2010 to estimate the cost of various categories of taxes to the economy. The study affirmed earlier evidence that corporate income taxes are generally more harmful than personal income taxes, and that personal income taxes are generally more harmful than sales taxes. 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.
While tax increases obviously cannot be blamed for all of the province’s economic troubles, the academic evidence suggests that they have done harm to the provincial economy. Paired with other increases in the cost of doing business in Alberta, such as ongoing minimum wage increases and a carbon tax on top of corporate and personal income tax increases, this year has been a bad year for Alberta’s competitiveness.
With persistent, large, spending-driven deficits projected to continue for years, uncertainty over potential further tax increases to service and/or repay the resulting debt may further hamper economic growth.
This past year was a difficult one for Albertans. While there are reasons to hold out hope for this year, such as pipeline approvals and recent oil prices increases, policy decisions that have eroded Alberta’s competitiveness will continue to hinder the province.
Steve Lafleur is an analyst at the Fraser Institute.
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