Corporate tax hikes ultimately reduce the wages of Canadian workers
Increasing corporate tax rates results in lower average wages for workers, finds a new study, released today by the Fraser Institute, an independent, non-partisan Canadian public policy think-tank.
Corporate income taxes are ultimately paid for by individuals either as workers through lower wages, consumers through higher prices or shareholders through lower returns on investments including RRSPs. The study, The Effect of Corporate Income and Payroll Taxes on the Wages of Canadian Workers, uses data from Statistics Canada for the period between 1998 and 2013 and looks only at the impact on wages.
“There’s a long-held misperception that an increase in corporate taxes has no effect on the pocketbook of average Canadians. In reality, all Canadians pay the cost of higher business taxes including workers through lower wages,” said Charles Lammam, director of fiscal studies at the Fraser Institute.
The study finds that, after controlling for other factors (such as a worker’s age, education, occupation, and industry), a one per cent increase in the corporate income tax rate reduces the average hourly wage rate of Canadian workers by between 0.15 and 0.24 per cent in the following year.
For example, if the 2012 average combined federal-provincial corporate income-tax rate (27.3 per cent) was increased by one-percentage point (to 28.3 per cent), the average national hourly wage would decrease between $0.13 and $0.20, which translates into a reduction of $254 to $390 in a worker’s annual wage.
This decrease in wages occurs through adjustments to the level, or more likely the growth rate, of wages. Over the longer term, higher corporate taxes reduce investment, hindering productivity growth, which ultimately impedes growth in wages and the standard of living of workers more broadly.
“While it may seem counter-intuitive to many people, ultimately only people can pay taxes. In the case of corporate taxes, a significant part of the burden falls on workers through lower wages,” Lammam said.
The study also examines the effect of an increase in the employer portion of payroll taxes—contributions made on behalf of employees to such government programs as CPP and EI.
For every one per cent increase in the employer portion of the combined federal-provincial payroll tax, wages decrease between 0.03 per cent and 0.14 per cent in the following year.
In dollar terms, this suggests that a one percentage point increase in the 2012 average combined payroll tax rate (10.5 per cent) would result in lower annual wages of between $137 and $605.
“For the past 15 years, federal and provincial governments across the country have recognized the advantages of lowering corporate taxes. Unfortunately, we’re starting to see a reversal as some provincial governments have increased corporate tax rates in recent years,” Lammam said.
“Governments must realize that if they choose to increase business taxes, ordinary Canadians will incur the cost, in part through lower wages.”