Alberta’s personal income tax rate hikes will likely bring in $1.7 billion less than expected
The Alberta government will likely receive $1.7 billion less than expected from its personal income tax rate hikes, finds a new study released today by the Fraser Institute, an independent, non-partisan think-tank.
The study, Alberta’s Personal Income Tax Increases Likely to Yield Less Revenue than Expected, calculates the amount of additional revenue the NDP government could collect as a result of its elimination of Alberta’s single, 10 per cent personal income tax rate in favour of a five-bracket tax system with a top marginal tax rate of 15 per cent for people earning more than $300,000 per year.
“There’s a wide body of evidence showing that tax rate increases encourage people to change their behaviour to avoid paying additional taxes, yielding less revenue than expected by governments” said Charles Lammam, Fraser Institute director of fiscal studies.
For example, to mitigate their personal income tax burdens, individuals may choose to work fewer hours or they may opt for more tax-favourable forms of compensation such as extra vacation time or fringe benefits that are often tax free.
Higher income earners, in particular, may be better positioned to take advantage of a variety of tax saving mechanisms already available in the tax code.
As a result, the additional revenue from tax rate increases often falls short of expectations.
The study compares two forecasting models to estimate the revenue impact from recently implemented personal income tax rate hike: one that accounts for behavioural changes and one that does not, which is the method most often employed by governments.
In the latter model — where it’s assumed tax revenues will increase in exact proportion to tax rate increases — the Alberta government might expect an additional $6.7 billion from 2016 to 2020.
But when behavioural responses are appropriately accounted for, the government will likely take in $5 billion in new revenue, a difference of $1.7 billion over the period.
“We’ve seen it time and time again with both personal and corporate tax increases, where politicians take a simplistic view of tax rates and tax revenues,” said Steve Lafleur, Fraser Institute senior policy analyst and study co-author.
“If the Alberta government fails to account for the behavioural effects spurred by its personal income tax rate hikes in next week’s budget, it could be in for larger deficits and more debt than already planned.”