Why an 8% corporate tax rate won’t create 55,000 jobs

As I mentioned in an earlier article, the Alberta government recently announced a recovery plan that included $10 billion in capital spending. But that was the good news (kind of).

Today, I’ll be talking about the bad news. Or at least some of it.

A major campaign promise of the United Conservative Party was not only eliminating the corporate tax increases the NDP implemented but also further cutting the tax rate, making it the lowest corporate tax rate in the country and even lower than nearly every state in the US.

The original plan was to cut it from 12% to 11% immediately, which they did last summer. Then they planned to add another 1 percentage point cut every year until it was down to 8%.

This past January, they cut the rate to 10%, where it was when the NDP took power in 2015. They were on track to drop it to 9% next January and finally to 8% in January 2022.

The recovery plan changed all that.

The UCP government decided that one key to boosting the economy is reducing the tax rate more quickly, immediately bringing it to 8%, 2 years earlier than planned.

The problem is that tax cuts don’t create jobs.

As I mentioned, the UCP implemented their first tax cut last July and the second this past January. Yet, despite the promises that the tax cut would lead to more jobs, Alberta lost 52,000 full time jobs between July and February. If you include all the jobs lost during the pandemic, that number surpasses 300,000.

In fact, in January alone, when the UCP cut corporate taxes to 10%, Alberta lost 34,200 private sector jobs.

According the recovery plan document, the tax cut was supposed to add 55,000 jobs in Alberta:

Budget 2020 estimated that the Job Creation Tax Cut would increase investment in the province by about $4 billion per year by 2023 and real GDP growth by 0.3 percentage points annually between 2020 and 2023. Research suggested the tax changes could add more than 55,000 jobs by 2022.

p. 13

Remember, that’s not create 55,000 jobs; it’s add 55,000 jobs. In other words, 55,000 jobs that didn’t exist before the UCP took office. These aren’t replacement jobs; they’re additional jobs.

I assume that’s 55,000 jobs during the entire 4-year term and not per year. So if that’s the case, and we’re also currently 52,000 full-time jobs in the hole (not including the pandemic job losses), then that means Alberta must create 107,000 jobs in the next 3 years to get us to where the UCP predicted we’d be in 2023 because of the tax break.

And again, that’s not including the 250,000 or so jobs lost during the pandemic, which everyone assumes will be automatically refilled once the pandemic is over.

But back to my point about tax cuts not creating jobs. In the Recovery Plan, we find this quote:

Businesses are the drivers of employment in this province. Implementing this promise eighteen months ahead of schedule will boost economic growth and employment.

p. 13

This is just fundamentally wrong. Businesses don’t create jobs; consumers do.

The more money consumers have, the more they spend. The more they spend, the more companies must produce. And to increase production, companies must hire more labour.

Companies don’t increase production—and thus hire more workers—just because they pay less in taxes. Taxes come out of a company’s profits. So if they pay less in taxes, it means they have more profit, and no one is going to hire more workers just because they have more money on hand, unless demand was already increasing for their products and services.

The idea that a company is just going to hire more workers to meet the demand they’re already meeting with their current workforce simply because they happen to have more profit is nonsensical.

Companies don’t pay corporate income tax on worker wages; they pay taxes on what’s leftover after worker wages (well, and all other expenses). When it comes down to it, actually, the more that companies pay out in wages, the less they have leftover to have to pay in taxes, in absolute dollars.

Which means that if you really want to cut down on how much companies pay in taxes, encourage them to raise worker wages. Those workers will then spend that money (on groceries, clothes, gas, homes, cars, hunting trips, hockey games, dance classes, and so on). That extra spending will drive up demand, which will further increase production, leading to more jobs.

Companies pay less in taxes, workers improve their standard of living, more jobs are created. Win, win.

If you want to create more jobs, encourage companies to pay their employees more, don’t cut public sector wages, and hire more public sector workers.