Corporate income tax cuts will benefit working Albertans

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Appeared in the Calgary Sun, May 22, 2019
Corporate income tax cuts will benefit working Albertans

Alberta’s general corporate income tax (CIT) rate is on the move, for the second time in the last four years. Incoming Premier Jason Kenney plans to reduce the CIT by four percentage points over four years, from 12 per cent to 8 per cent.

The CIT reduction is good news for Albertans. A substantial body of evidence shows that uncompetitively high corporate income tax rates push down wages and stifle job creation—while not providing much additional revenue for governments. In short, competitive CIT tax rates are crucial to Alberta’s long-term prosperity and, despite the Alberta’s red ink, are entirely affordable.

Until 2014, Alberta’s provincial CIT was 10 per cent. When combined with the 15 per cent federal rate, the province’s general CIT rate clocked in at 25 per cent—the lowest of any province or U.S. state. This changed in 2015 when the Notley government raised the province’s CIT rate to 12 per cent, and the United States reduced its federal CIT in 2017. In other words, our chief competition for jobs and investment slashed CIT rates while ours went up. Subsequently, the general CIT rates in some U.S. states are now six points lower than in Alberta. Alberta’s CIT rate advantage was wiped away, and replaced with a disadvantage.

But the new Alberta government’s promised reduction would give the province the lowest CIT rate in Canada (by a wide margin) and bring Alberta within two percentage points of the most competitive U.S. states.

So why, exactly, is a lower CIT rate good news for working Albertans?

First, capital is mobile. There’s no law of nature that dictates investment must come to Alberta. If competitor jurisdictions such as Texas or North Dakota offer more attractive investment opportunities, they will reap more of the rewards. Investment decisions depend on many factors, and there are factors Alberta can’t control. But the level of corporate taxation is one we can.

Second, while critics like to paint CIT reductions as “handouts to the rich,” the distributive impacts are far more complicated. Almost every middle-income Canadian owns shares of companies through retirement accounts, employer pension plans and public plans including the CPP. Yes, young families might not yet have substantially grown their pension savings. But higher corporate income taxes impact workers through lower wages and consumers through higher prices. It’s not just business owners who are hurt by high CIT rates, it’s those who work for and buy things from them.

Of course, one might worry about reducing corporate taxes given that Alberta is on track to run budget deficits until 2023/24 (though the new government plans to balance the budget a year earlier). But the cost to provincial coffers of reducing the CIT to 8 per cent would be relatively small—well under $2 billion annually. And that assumes that zero additional economic growth would accompany the more competitive rate, an unrealistically conservative assumption. In practise, the government revenue hit from a lower CIT rate will be offset by greater economic growth, and subsequent growth the tax base.

The high-tax approach of recent years hasn’t fixed Alberta’s deficit and hasn’t helped the economy grow. Investment is down, unemployment is up. Many Alberta families are hurting. Reducing Alberta’s corporate income tax rate would help to create more favourable conditions for investment and help spur job growth. Albertans could stand much more of both.

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