If there's one thing that Wildrose leader Brian Jean and Progressive Conservative leader Jim Prentice seem to agree on, it's that even a moderate increase in Alberta's corporate tax rates will lead to significant job losses as corporations shutter up their Alberta-based operations and flee to greener tax pastures.
During last week's leaders debate, Jean responded to a question about the NDP platform plank to increase corporate taxes from the current lowest-in-Canada rate of 10% to 12% by saying, "Leading economists have been clear: a 1% increase in corporate taxes means 9,000 jobs. What they're proposing [the NDP] is to eliminate almost 20,000 jobs in Alberta." It was a talking point that Jean lifted directly from the PC's election platform, which states, "Economist and tax expert Jack Mintz from the University of Calgary has pointed out that a one per cent increase of the corporate tax could cost Alberta billions in investment and 8,900 jobs."
The argument put forward by Jack Mintz, a University of Calgary economist and advisor to Alberta’s Progressive Conservative government, that 9,000 jobs will be lost for every one point increase in the corporate tax rate has been echoing since long before the election writ was dropped. Mintz's authority has been used to justify the March 26 provincial budget holding the line on corporate taxes (despite an increase being the second most popular source of revenue generation in the government's own pre-budget survey).
In response, the Alberta Federation of Labour (AFL) pointed out that in the two years following the April 2013 move in British Columbia to increase corporate income tax from 10% to 11%, the BC economy actually added 37,000 jobs.
Then, in an April 15th article in the Financial Post, Mintz criticized the AFL’s analysis.
Mintz’s critique of the AFL is based on a misrepresentation of the labour organization's claims. The AFL did not actually argue that raising the corporate income tax increased employment; what the AFL argued was that the BC government increased corporate income tax rates to deal with a deficit and the sky (and employment) didn’t fall. In fact, the economy added jobs after the corporate tax hike.
Mintz actually concedes that BC’s "private sector employment did rise by 37,000 jobs over two years," but he bemoans the fact that "B.C. now has the sixth-highest tax burden on capital investment" amongst Canadian provinces.
Non-partisan viewers of this debate on corporate taxes can be forgiven for failing to see the downside of increased provincial revenue coupled with job growth.
But why is Mintz, a university-based economist, creating a straw man argument to critique the AFL’s position?
Immediately after the publication of Mintz’s opinion piece, Alberta’s NDP provided an answer to this very question. It turns out that Mintz is hardly a non-partisan, neutral outside observer of Alberta’s politics. Rather, in addition to being an advisor to the Alberta PC government, Mintz has a self-interest to advocate for the interests of the oil industry, most notably Imperial Oil, a corporation which Mintz serves as a member of its Board of Directors, making a comfy six-figure salary and holding over $1.3 million in investments. This, of course, is on top of his faculty salary from the University of Calgary.
These inconvenient facts separate Mintz from the ivory tower and bring him into the crosshairs of partisan politics during the most exciting Alberta election in recent memory, particularly in a context where 69% of Albertans who participated in the government’s pre-budget survey indicated they support a hike in Alberta's bottom-of-the-pack corporate income tax rate.
Mintz’s article acknowledges that the Prentice government did in fact ask him for an opinion on what effect a 1% corporate income tax increase would have on Alberta’s economy. Here he claims, "based on some earlier refereed work: It would cut corporate investment by $6 billion and private sector jobs by 8,900." This claim, dating back to 2010, has even been used in recent PC election mailouts – directly connecting Mintz to the political process. Following the debate the Wildrose even issued an approved "reality check" in an attempt to out-Mintz the Conservatives, connecting him even more to the right-wing of the current electoral debate.
Mintz’s advice to the provincial Tories and Wildrose is based on abstract economic modelling of hypothetical scenarios. Back in the real world, the government of British Columbia raised the rate of taxation on corporations’ profits and the sales tax on capital purchases and the BC economy still managed to create 37,000 jobs.
The Parkland Institute has been asked by a number of our supporters since the leaders debate to comment on Mintz’s argument (which both Prentice and Jean have not hesitated to repeat ad nauseam). Here, then, are a few counter-points to Mintz’s assertions.
1. The suggestion of job losses resulting from a corporate tax increase is dependent on the belief that businesses will pack up and leave Alberta and/or that they will lay off workers to compensate for the higher taxes. But there are problems with those assumptions.
To pack up and leave they would need to go to a lower tax jurisdiction to make it worthwhile. If Alberta raised the corporate income tax rate by 1%, there would still be nowhere else in Canada with lower taxes. (Raising corporate rates to 12%, as the NDP is proposing, would put Alberta's corporate rate higher than just two provinces (Ontario and BC) and one territory (NWT).)
This moving scenario requires that the savings in corporate taxes would be greater than the cost and hassle of having to shut down one operation, move, and open another one from scratch. It could also mean buying new equipment and other supplies in a province with a sales tax, as Alberta remains the only province without a provincial sales tax.
2. For the many US companies operating in Alberta (the US provides two-thirds of foreign investment to Alberta), an increase in our provincial corporate income tax wouldn’t actually affect their bottom line at all because of what is called “the treasury transfer effect.”
The US government taxes the profits that US corporations make in foreign countries, such as Canada, at a rate of 35% (minus taxes paid in the country where the profits were made). Due to drastic cuts to corporate income taxes by the Canadian federal and Alberta governments over the last 15 years, the combined federal and provincial corporate income tax rate is now 25%. What this means is that US corporations exploiting Alberta's natural resources for a healthy profit are paying our provincial government 10% tax, the Canadian federal government 15% tax, and the US federal government 10% tax. These US corporations have to pay 35% tax on profits made outside of the US regardless of what the tax rates are in those countries and provinces. So if the Canadian federal and Alberta provincial tax rates added up to 35%, instead of 25%, then all of that money would stay in Canada and the bottom line of the US corporation wouldn’t be affected at all. A corporate income tax increase of 1% in Alberta for these US companies would just mean that they would begin paying that extra 1% to the Alberta government rather than the US government, but their total tax bill would not change at all.
3. Jack Mintz himself admits in his opinion piece that the corporate tax rate is just one factor influencing corporate behaviour, and that "various factors affect investment besides taxation." Other factors include, but are not limited to, labour force size, flexibility and potential; health and education infrastructure; transportation infrastructure; proximity to natural resources; and proximity to other related businesses (it makes no sense, for example, for an oilfield supply company to move its operations to BC). To then turn around, as Mintz does, and claim that a slight increase in corporate taxes directly leads to lower corporate investments and a reduction in private sector jobs is disingenuous.
4. The flip side of Mintz’s argument, which he chooses to ignore, is that government spending cuts and job cuts that come as a result of collecting $11 billion less in taxes compared with the next-lowest-taxed Canadian province also has negative spinoff effects, namely the permanent austerity Albertans live under, the chronic underfunding of our public services, and an economy that is overly dependent on resource revenue.
As pointed out by Kathleen Lahey in her recent Parkland Institute report, the provincial government was well aware of these downsides to continued low corporate tax rates, writing in Budget 2006 that "A broader range of taxes means more stable revenues. With relatively fewer revenue sources, predictable funding for key public services is at more risk in the event of an economic slowdown. Consequently, it is inadvisable to eliminate or dedicate more taxes."
5. If the concern with public policy in the current economic climate in Alberta is truly on creating jobs (or, alternatively, on avoiding losing them), research suggests that there are more effective means than cutting corporate tax rates or maintaining low rates. As pointed out by the Canadian Centre for Policy Alternatives in a 2011 report, the Harper "government's own stimulus multipliers show that corporate income tax cuts are the least effective means at the government's disposal of creating economic growth and jobs in the short run. Instead, social housing and infrastructure investments top the list, creating 10 times as many jobs per public dollar spent."
Writing about federal corporate tax cuts in 2011, economist Jim Stanford argued that cutting corporate tax rates has at best a lukewarm impact on the economy, and can actually lead to fewer net jobs than other strategies: "According to the Dept. of Finance multiplier coefficients, the tax cuts would generate just under $1 billion in new GDP, and just under 10,000 jobs (equal to $3 billion times 3,310 per billion). In contrast, if the same funds had been spent on extending EI benefits, GDP would expand by over $5 billion ($3 billion times 1.7), generating 56,000 jobs ($3 billion times 18,755 jobs per billion). The net effect of the tax cut, compared to the allocation of equivalent funds to more powerful stimulative measures, is the elimination of 46,000 jobs. (In economic parlance, the foregone jobs that would have been created if the money had been allocated to other initiatives is the “opportunity cost” of the corporate tax cuts.) ... $3 billion in infrastructure investment would generate about 53,000 jobs, while $3 billion in housing investment would generate under 50,000 jobs." (Emphasis added)
Since the global financial meltdown of 2008/09, the Canadian economy has not done well in creating good jobs. Many of the jobs that have been created are either low-paying and/or part time. Public sector job creation has played an important role in helping the Canadian and Alberta economies weather the financial turmoil since the Great Recession. If the Alberta government chose to collect corporate and personal income taxes more in line with the other Canadian provinces, it could afford to provide Albertans with the level of public services they deserve, and this new government attitude toward taxes would result in more Albertans working good jobs, which would further increase our tax revenues and the amount of money circulating in our economy.
Perhaps Prentice and Jean would do better to listen to the 69% of Albertans who favoured corporate tax increases in the government's own budget survey, rather than a single 1% economist who argues against them.
Blog post written by Ian Hussey, Barret Weber, and Ricardo Acuña.