The Alberta government recently announced plans to help encourage economic recovery and growth in the province, including a plan to accelerate corporate income tax reductions that were already in the works.
The corporate tax rate will drop from 10 percent to eight percent immediately instead of gradually over the next two years.
Critics have characterized this move as a handout to the rich. However, a look at the evidence about who actually bears the burden of the corporate income tax paints a much more nuanced picture.
In reality, the corporate tax burden is spread across the income spectrum much more than critics realize. There’s strong evidence that over time businesses respond to increased tax burdens by slowing the rate of growth in wages for their employees.
One recent study (by professors Kenneth McKenzie of the University of Calgary and Ergete Ferede of MacEwan University) shows that for every dollar of government revenue raised by corporate income taxes, the aggregate wages of all workers in Alberta falls by $1.52. A two percentage point increase in Alberta’s corporate tax rate reduces labour earnings for an average two-earner household by more than $800 per year.
A higher corporate income tax doesn’t just impose costs on people who own corporations, but also people who work for them. So Alberta’s accelerated corporate tax reduction will benefit Albertans throughout a large share of the income distribution – not just ‘the rich.’
The evidence also supports the Alberta government’s claim that accelerating corporate tax reductions will help encourage job creation and income growth in the province, largely because reduced corporate rates help increase investment.
Increased job creation – compared to what would have happened otherwise – is another effect of corporate tax reductions that obviously benefits a wide range of Albertans and not just those with higher incomes.
Of course, tax rates are just one factor businesses and entrepreneurs consider when deciding where to invest and how much. So it’s a mistake to think accelerating the already-planned corporate tax reduction is a panacea for the many economic challenges Alberta faces. Still, the evidence shows the reductions will help increase the province’s chances of a strong recovery.
As Alberta, and the rest of Canada, looks to recover from a series of economic blows, public debate about various policy options should be informed by data and evidence, not misleading populist talking points.
While critics will continue to claim corporate income tax reductions only benefit ‘the rich,’ in reality the reductions will help encourage job creation and wage growth, two things we need a lot more of, perhaps now more than ever.
Ben Eisen is a senior fellow with the Fraser Institute’s Alberta Prosperity Initiative.