By Steve Lafleur
and Ben Eisen
The Fraser Institute
In last week’s federal Throne Speech, the Liberal government restated its intention to create a new, higher top federal personal income tax rate. This tax hike will hinder Canada’s economic performance, but it is of particular concern in Alberta.
The Liberals’ planned new top marginal tax rate on personal income of 33 per cent will apply to those earning more than $200,000 of income (the existing top rate is 29 per cent). The problem is that a robust body of research finds that high and increasing personal income tax rates discourage work, savings, investment and entrepreneurship.
This federal tax hike will be especially painful in Alberta as it would come on the heels of a recent increase to provincial personal income tax rates. In October, Alberta increased its provincial top rate from 10 to 15 per cent, a 50 per cent jump.
Taken together, the provincial and federal increases will cause Alberta’s top combined rate to climb from 39 per cent to 48 per cent. In other words, in a few short months, the combined federal-provincial top marginal income tax rate will have increased by 23 per cent.
Alberta started this year with the lowest top combined personal income tax rate among Canadian provinces and U.S. states. After the federal increase, Alberta’s top rate will be higher than important competing oil-producing American states including Alaska, North Dakota and Texas.
The federal personal income tax increase is yet another blow to Alberta’s competitiveness vis-à-vis its peer jurisdictions, hindering Alberta’s economic recovery, and putting another nail in the coffin of Alberta’s reputation as a low-tax jurisdiction among energy producers.
Making matters worse, the income tax hikes at both levels of government will likely bring in much less revenue than governments expect. That’s because tax-filers – particularly upper-earners – respond to higher rates in a number of ways including reducing their labour supply, incorporating as businesses to take advantage of lower rates, and shifting income to, or perhaps even physically leaving to, lower tax jurisdictions. This can reduce the tax base, meaning that higher rates will be applied to a lesser amount of taxable income. As a result, governments usually receive less additional revenue than they expect. In more extreme cases, it can mean they actually lose revenue.
In fact, a recent study estimated that this type of behavioural change by taxpayers could lead to the federal government collecting $1.8 billion less from their proposed tax hike than projected in the Liberal platform. Moreover, the report cautions that by shrinking the tax base, this could also lead to a $1.4 billion collective revenue loss for provincial governments.
A recent Fraser Institute study of the potential impact of Alberta’s income tax increases raised similar concerns. The report noted that if the provincial government fails to account for behavioural changes, it could receive 46.4 per cent less revenue from its tax increases than anticipated by 2025. Layering a federal income tax increase on top could shrink the tax base and create an even larger budgetary shortfall.
Alberta continues to face significant economic challenges. Rather than make matters worse, governments should implement pro-growth economic policies. Further personal income tax rate hikes will have the opposite effect, undermining competitiveness while reducing investment, savings, entrepreneurship and overall economic growth.
In this difficult economic climate, a higher top federal income tax rate would only make it harder still for Albertans and their families to prosper in the years ahead.
Steve Lafleur and Ben Eisen are analysts with the Fraser Institute.