High income tax rate hurting Alberta economy

In recent years, due to federal government and provincial tax hikes, Alberta’s top personal income tax rate has substantially increased.

First, in 2015, the Notley government replaced the province’s single personal income tax rate of 10 per cent with five tax brackets including a top rate of 15 per cent, thus raising Alberta’s top tax rate by five percentage points. Then in 2016, the Trudeau government raised the top federal rate by four percentage points. Due to the combined effect of these tax hikes, Alberta’s top income tax rate increased from 39 per cent in 2014 to 48 per cent today.

To understand the effect of this change, consider this. In 2014, before the provincial and federal tax increases, to increase their take-home pay by $100, Albertans facing the top marginal tax rate had to earn an additional $164 compared to $192 today.

So, why should all Albertans—not just the “rich”—care?

Because such high tax rates reduce the incentives for additional productive economic activity. This undermines long-term economic growth in the province. And high tax rates make it harder for Alberta to attract mobile high-skilled workers (doctors, entrepreneurs, etc.) who have lots of choices about where to live. With a top income rate of 48 per cent, Alberta is among the top 10 highest tax jurisdictions in Canada and the United States.

Of course, taxes aren’t the only factor people consider when choosing where to live, but for high-earning individuals who see a large share of their income subjected to that rate, such a high tax rate makes Alberta less attractive than it would otherwise be compared to nearby U.S. states, for example, with much lower tax rates.

Finally, it’s not clear that Alberta’s high tax rates even achieve their implied goal of generating substantial new government revenue because, again, high tax rates reduce incentives for production and dampen economic growth, which shrinks the size of the underlying tax base. Indeed, a growing body of evidence suggests recent provincial and federal tax increases in Canada aren’t actually producing much more money for governments. In other words, it’s economic pain for little if any gain.

To be fair, the Alberta government has reduced the business tax rate in the province from 12 per cent to 8 per cent, restoring Alberta’s substantial business tax advantage over all other provinces. According to a significant body of evidence, this change will help encourage economic growth and job creation.

Ultimately, while raising taxes on top income earners may be politically attractive, it impedes Alberta’s ability to grow the economy. Reducing business taxes was a step in the right direction, but the Smith government should now reduce personal income taxes on Albertans as well.