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As Alberta MLAs prepare to return to Edmonton for the fall session of the legislature, tax reform should be near the top of the agenda — with an eye on spurring economic growth and prosperity in the province. Earlier this year, the Smith government introduced a new provincial personal income tax bracket that cut the province’s bottom personal income tax rate from 10% to 8% for income up to $60,000. And the Carney government recently cut the bottom federal rate from 15% to 14% for income up to $57,375. These tax cuts will deliver some tax relief for Albertans across the income spectrum.
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But they also shift more of the tax burden onto higher-income earners. In fact, according to our new study, the top 20% of income-earning families in Alberta — those earning $261,609 or more — earn 47.2% of all income in the province yet pay 65.5% of personal income taxes (collected by the federal and provincial governments) and 57.1% of total taxes (sales taxes, property taxes, income taxes, etc.) collected by all three levels of government in Alberta.
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Smaller share of the burden
Other income groups carry a much smaller share of the tax burden. For example, the middle 20% of Albertan families — those earning between $112,173 and $169,496 — earn 15.3% of total income in the province yet pay 10.5% of personal income taxes and 13.3% of total taxes. The bottom 20% of Albertan families — those earning up to $65,091 — earn 4.6% of total income yet pay 0.4% of personal income taxes and 1.6% of the total tax burden.
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In other words, not only do high-earning families in Alberta pay the majority of all taxes in the province, they’re also the only income group to pay disproportionately more than their share of total income.
Why? Because governments in Canada maintain “progressive” tax systems that impose larger tax burdens on Canadians who earn higher incomes. In Alberta, provincial income tax rates increase from 8% on income up to $60,000 to 15% on income above $362,961. Governments also offer various tax credits and deductions (e.g. Alberta’s Child and Family Benefit or the federal GST/HST credit) that lower the tax burden for people with lower incomes.
Problem with progressive tax system
Under a progressive tax system, when your income tax rate increases as you earn more money, you face a decision about whether or not to move for a new job, work more hours, invest your savings or start a business. High and increasing tax rates may discourage people from being more productive and earning more money, because higher taxes reduce the reward (i.e. additional income) they receive. When multiplied across the entire economy, this effect hinders overall economic growth and prosperity.
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Which takes us back to the recent Smith and Carney tax cuts. While they offer some tax relief for Albertans, they exacerbate this damaging effect and add to the disproportionate share of the tax burden borne by high-income Albertan families. If the Smith government wants to reduce the potential damage, it should reduce tax rates for all Albertans.
Jake Fuss and Grady Munro are fiscal policy analysts at the Fraser Institute.
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