This is a tale of two very different Alberta budgets and a lesson on the impact of corporate tax rates.
In 2001, the Progressive Conservative government aggressively attacked the province’s corporate tax burden. “Alberta should respond to the worldwide trend to lower corporate income tax rates,” the budget document noted. “If we don’t, we risk losing increasingly mobile capital and highly skilled people.”
Following through on recommendations from its tax review committee, the government eliminated the financial institutions capital tax and cut the corporate tax rate from 15.5 per cent to 13.5 per cent, and then to 10 per cent by 2006. Also, the small business income threshold was increased from $200,000 to $300,000, and then to $400,000 by 2004.
The result of lowering corporate taxes was a massive increase in business investment in Alberta. Neighbouring Saskatchewan implemented similar tax cuts in 2006, and also experienced an investment boom. This is important because more productivity-raising capital and more businesses bidding for labour means higher wages for workers. When corporate taxes are cut, workers prosper.
Fast forward to the 2015 Alberta budget. In his first budget speech, NDP Finance Minister Joe Ceci called past tax cuts “a failed experiment in undercharging our largest and most profitable corporations.” The New Democratic government raised the corporate tax rate to 12 per cent, even though the private economy was already taking a beating from falling oil prices.
What are the effects of raising corporate taxes?
Last year, a University of Calgary study estimated that raising an additional $1 in government revenue through provincial corporate tax hikes would cost Alberta workers about $1.52 in wages. And not only workers would feel the brunt of the corporate tax hike; everyone else would be worse off, too.
For example, raising corporate taxes leads to higher prices for consumers. According to another University of Calgary study, the marginal cost of public funds – which is the cost to the private economy of raising an additional $1 in government revenues through Alberta’s corporate tax – is $2.91.
Far from being “a failed experiment in undercharging our largest and most profitable corporations,” the case for a lower corporate tax rate simply relies on the ability of private workers, investors and consumers to do more economic good with $2.91 than the government can do with $1. Surely there aren’t many safer bets than that.
The evidence is overwhelmingly against $1 in government spending doing as much good as $1 in private spending, let alone doing three times as much good. “Nobody spends somebody else’s money as carefully as he spends his own,” Nobel Prize-winning economist Milton Friedman often said. Nobody spends money more recklessly than politicians.
The case for Alberta now reversing its 2015 corporate tax hikes is even stronger when you consider that other jurisdictions have lowered corporate taxes. As the budget in 2001 noted, if Alberta fails to keep tax rates competitive, it will “risk losing increasingly mobile capital and highly skilled people.”
Recently, Ontario took a step toward making itself more attractive for capital and workers. Its newly-elected PC government proposes both a corporate tax cut (from 11.5 per cent to 10.5 per cent) and the elimination of the province’s carbon market cap-and-trade program. The primary beneficiaries of these tax cuts will be workers, since tax cuts encourage capital investment, which boosts productivity and wages.
More importantly, the United States federal corporate tax rate was recently slashed from 35 to 21 per cent. Just a few months ago, the president and CEO of RBC warned of a “significant” exodus of investment dollars from Canada to the U.S., with energy likely to be one of the most impacted sectors.
One of the best things the Alberta government could do to attract investment back into the province – and put more dollars into the pockets of workers – would be to reverse its 2015 corporate tax hike.
Matthew Lau is a research associate with the Frontier Centre for Public Policy.
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