This is a tale of two very different Alberta budgets.
In 2001, the-then PC Alberta government aggressively attacked the province’s corporate tax burden. “Alberta should respond to the world-wide trend to lower corporate income tax rates,” the budget document advised. “If we don’t, we risk losing increasingly mobile capital and highly skilled people.”
Following through on recommendations derived from a tax review committee, the Alberta government then eliminated the financial institutions capital tax, cut the corporate tax rate from 15.5 percent to 13.5 percent, and promised to bring the rate down to 10 percent by 2006. Complementary to the cuts, the small business income threshold was first increased from $200,000 to $300,000, and then bumped up further 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, likewise, also experienced an investment boom. Both in Alberta and Saskatchewan, the investment boom that followed the corporate tax cuts brought about more productivity-raising capital and businesses bidding for labour, leading to higher wages for workers. When corporate taxes are cut, workers prosper.
Fast forward to the 2015 Alberta budget. In its first budget speech, NDP Finance Minister Joe Ceci called past tax cuts “a failed experiment in undercharging our largest and most profitable corporations.” His NDP government followed through by raising the corporate tax rate to 12 percent, even though the private economy was taking a beating from then falling oil prices.
What are the effects of raising corporate taxes? Last year, a University of Calgary study estimated that raising each additional $1 in government revenue through provincial corporate tax hikes would cost Alberta workers about $1.52 in wages. Not only workers would feel the brunt of the corporate tax hike, everyone else was worse off too.
Raising corporate taxes leads to higher prices for consumers. Another University of Calgary study found that for every $1 increase in government revenues got through upping Alberta’s corporate taxes, the private sector lost $2.91.
Far from being “a failed experiment in undercharging our largest and most profitable corporations,” Ceci’s faulty and outrageous 2015 budget claim in acting to raise corporate taxes, lower corporate taxes properly rely on the ability of private workers, investors, and consumers doing more economic good with taxes saved than the government can do with taxes raised.
The evidence is overwhelmingly against the claim than an extra $1 in government spending does as much good as $1 in private spending. “Nobody spends somebody else’s money as carefully as he spends his own,” as often said by Nobel Prize-winning economist Milton Friedman. 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 actually lowered corporate taxes. As Budget 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 towards making Canada’s largest economy more attractive for capital and workers. Its newly elected PC government proposes both a corporate tax cut (from 11.5 percent to 10.5 percent) and the elimination of carbon taxes (cap-and-trade). The primary beneficiaries of the corporate tax cuts will be workers, as Ontario encourages capital investment, boosting productivity and wages.
More importantly, the US federal corporate tax rate has recently been slashed from 35 percent to 21 percent. Just a few months ago, the president and CEO of RBC warned of a “significant” exodus of investment dollars from Canada to the US, with energy likely to be one of the most impacted sectors.
One of the best things Alberta‘s government could do to attract investment back into the province – and put more dollars into the pockets of workers – would be to reverse the 2015 corporate tax hike.