Over the past decade, Alberta has gone from one of the most competitive tax jurisdictions in North America to one of the least. And while Danielle Smith’s government has promised to create a new 8% tax bracket on personal incomes below $60,000, it simply isn’t enough to restore Alberta’s tax competitiveness. Instead, the government should institute a flat 8% personal and business income tax rate.
Back in 2014, Alberta had a single 10% personal and business income tax rate. As a result, it had the lowest top combined (federal and provincial/state) personal income tax rate and business income tax rate in North America. This was a powerful advantage that made Alberta an attractive place to start a business, work and invest.
In 2015, however, the provincial NDP government replaced the single personal income tax rate of 10% with a five-bracket system including a top rate of 15%, so today Alberta has the 10th-highest personal income tax rate in North America. The government also increased Alberta’s 10% business income tax rate to 12% (although in 2019 the Kenney government began reducing the rate to today’s 8%).
If the Smith government reversed the 2015 personal income tax rate increases and instituted a flat 8% tax rate, it would help restore Alberta’s position as one of the lowest tax jurisdictions in North America, all while saving Alberta taxpayers $1,573 (on average) annually.
And a truly integrated flat tax system would not only apply a uniform tax 8% rate to all sources of income (including personal and business), it would eliminate tax credits, deductions and exemptions, which reduce the cost of investments in certain areas, increasing the relative cost of investment in others. As a result, resources may go to areas where they are not most productive, leading to a less efficient allocation of resources than if these tax incentives did not exist.
Put differently, tax incentives can artificially change the relative attractiveness of goods and services, leading to suboptimal allocation. A flat tax system would not only improve tax efficiency by reducing these tax-based economic distortions, it would also reduce administration costs (expenses incurred by governments due to tax collection and enforcement regulations) and compliance costs (expenses incurred by individuals and businesses to comply with tax regulations).
Finally, a flat tax system would also help avoid negative incentives that come with a progressive marginal tax system. Currently, Albertans are taxed at higher rates as their income increases, which can discourage additional work, savings and investment. A flat tax system would maintain “progressivity” as the proportion of taxes paid would still increase with income, but minimize the disincentive to work more and earn more (increasing savings and investment) because Albertans would face the same tax rate regardless of how their income increases. In sum, flat tax systems encourage stronger economic growth, higher tax revenues and a more robust economy.
To stimulate strong economic growth and leave more money in the pockets of Albertans, the Smith government should go beyond its current commitment to create a new tax bracket on income under $60,000 and institute a flat 8 per cent personal and business income tax rate.
Tegan Hill is an analyst at the Fraser Institute.
