Alberta's Personal Income Tax Increases Likely to Yield Less Revenue than Expected

On October 1, 2015, the government of Alberta abandoned its single 10% personal income tax rate in favour of a 5-bracket personal income tax system with a top marginal tax rate of 15%.

Changing tax rates prompts people to alter their behaviour, which can lead to less additional revenue than governments might expect. This study estimates how much revenue the government will likely generate from its tax increases under a static model (with no behavioural response) and a dynamic model (that accounts for changes in behavior).

The tax increases would raise $1.242 billion assuming no behavioural changes and $1.058 billion assuming changes in 2016, a gap of 14.8% ($184 million). The dynamic model predicts that the additional revenue from the tax increases cumulatively between 2016 and 2020 will be 25.8% less than under a static model. The difference over the 2016-2025 period is predicted to be 34.9%. When taxpayers’ behavioural responses are accounted for, the government of Alberta is likely to receive $1.7 billion less than expected between 2016 and 2020. Between 2016 and 2025, the difference between the static and dynamic model will increase to $5.1 billion.