Higher corporate taxes mean lower wages for workers

With governments across Canada mired in persistent deficits, we have seen a surge of misguided tax increases in an attempt to close budget gaps. Often, the loudest calls are for higher business taxes, given a widely held misperception about who ultimately pays such taxes.

Critically, the group that ultimately bears the burden of a tax can be different from the entity responsible for sending the revenue to government. And when it comes to corporate taxes, some simply—and wrongly—assume corporations pay them in an economic sense, leading to inaccurate claims about the desirability of raising such taxes.

Corporate income taxes are ultimately paid for by people either as workers through lower wages, consumers through higher prices, or shareholders through lower returns on investments including RRSPs. While the objective of groups pushing for higher corporate taxes may be to increase the tax burden on “big business” or owners of capital, taxes shifted to consumers or workers are clearly not paid by “corporations,” even in the loosest meaning of the term.

Economists generally accept that the burden of corporate taxes falls to some extent on workers through lower wages. Empirical evidence from the United States and Europe confirms this.

A new Fraser Institute study examines data for Canada and lends further support for this finding. The study uses individual-level data from Statistics Canada over the period between 1998 and 2013 and looks at the impact of higher corporate taxes on worker wages. It finds that, after controlling for other factors (such as a worker’s age, education, union status, firm size, occupation, industry, and a host of economic variables), a one per cent increase in the corporate income tax rate reduces the average hourly wage rate of Canadian workers by between 0.15 and 0.24 per cent in the following year.

Let’s put that result into context.

If the 2012 average combined federal-provincial corporate income tax rate (27.3 per cent) was increased by one percentage point (to 28.3 per cent), the average national hourly wage rate in Canada would decrease between $0.13 and $0.20, which translates into a reduction of $254 to $390 in a worker’s annual wage—not a trivial amount. And it’s just the effect on wages, not accounting for the effect on prices or investment returns. (Incidentally, Alberta recently hiked its rate by two percentage points.)

The decrease in wages occurs through adjustments to the level, or more likely the growth rate, of wages in the very short term. Over the longer term, however, higher corporate taxes reduce investment, hindering productivity growth, which ultimately impedes growth in wages and the standard of living of workers more broadly. So the magnitude of the effect above is almost certainly understated.

While all this may seem counter-intuitive, ultimately only people can pay taxes. In the case of corporate taxes, a significant part of the burden falls on workers through lower wages.

For the past 15 years, the federal and provincial governments recognized the advantages of lowering corporate taxes and worked to make Canada’s business tax regime more competitive internationally. Unfortunately, some provincial governments have started back-sliding recently (Alberta, British Columbia, New Brunswick, to name a few) increasing corporate tax rates as they struggle to balance their budgets.

But governments must realize that if they increase business taxes, the evidence shows ordinary Canadians will incur the cost, in part through lower wages.