The Alberta Advantage isn’t in low taxes, but in its people
By Junaid Jahangir
A poll from December showed that one in five Albertans who voted for the UCP now regret their decision. This comes about as the incumbent government is on an expenditure-hacking spree that negatively impacts teachers and students, nurses, and patients amongst others.
Balancing the budget is not rocket science. Every first-year economics student learns that the budget is as easy as tax revenue minus government expenditures—or T – G, for short. To balance a budget, you need to increase T and/or reduce G spending.
First-years also learn that living standards rest on productivity, which is based on the production function of the economy. This production is determined by physical capital and human capital apart from other factors. Higher living standards, then, entail the accumulation of physical and human capital.
A skewed emphasis on physical capital accumulation leads policies that strengthen the corporate sector, hoping that tax incentives will create jobs. Emphasis on human capital is, in short, education, healthcare, etc.
Inequality has exacerbated over the last few decades, so any policies that incentivize the wealthy or huge corporations are met with skepticism. This is especially so in the case of the UCP government, which has allowed corporate tax cuts concomitant with reductions in expenditures on healthcare and education.
However, tax cuts don’t necessarily create jobs, as has been manifest in the case of Alberta. Abhijit Banerjee, who won the 2019 Nobel Prize in Economics, has been very clear that instead of corporate tax cuts, we need to tax the wealthy that are sitting on cash to spur demand in the economy.
Banerjee is not alone in this prescription. Heavy weight economists including Peter Diamond, Nobel Laureate at MIT, Emmanuel Saez at Berkeley, Christina Romer and the French economist Thomas Piketty have all argued for an optimal top marginal tax rate of 73 per cent, 80 per cent or above.
The reasoning is simple. The marginal utility of an additional dollar is much lower for a wealthy person than it is for a person with meagre means. This means taxing away from the uber wealthy does not hurt them as much as it benefits those at the fringes of the poverty line. The lesson this brings for Alberta is that instead of cuts to education and healthcare, there should be higher taxes.
Even without undertaking an academic study with rigorous econometric methods, the numbers speak for themselves. Consider for instance the first year of the NDP government (noted for its spending) in 2015 with the first year of the UCP government (noted for its cuts) in 2019.
Alberta’s fortunes rest on oil prices, specifically the Western Canadian Select, which is relevant for the province. The first year of the NDP government coincided with a huge drop in oil prices from $73.6 to less than half, at $35 /bbl.
The economy suffered a negative growth rate of -3.7 per cent. In contrast, the first year of the UCP government showed an increase from about $38 to $44.28 /bbl. Additionally, the economy has been relatively better at a positive 1.9 per cent growth rate.
Economic conditions in both years have been weak, but relatively better in 2019 than in 2015. Yet, employment increased by 28,000 in 2015 and only by about 9,500 in 2019. The unemployment rate was 6.04 per cent in 2015, lower than the then Canadian average of 6.9 per cent, whereas it was 6.94 per cent in 2019, much higher than the Canadian average of 5.65 per cent.
Finally, for all the shock and awe talk on the budget deficit, it was about $6.5 billion in 2015 and stands at $8.7 billion in 2019. The UCP government speaks of balancing the books by the end of 2023. If history is any guide, Albertans know how this works. No wonder, the polls show that 53 per cent of Albertans disapprove of the UCP government performance.
In several developing countries, people have no choice, as they are pressed down by autocrats, theocrats and military regimes. But Albertans had a choice.
There is a saying in Urdu, which is literally translated as “to axe one’s own feet.” Albertans are getting what they voted for, just as Americans are reaping the cuts from the policies instituted by Trump.
Maybe the support for right-wing political ideology is explained by the fact that people often turn to self-inflicting pain, stigma and sacrifice as a form of absolution to deal with uncertainty and existential angst.
Regardless, Alberta’s advantage does not lie in lower taxes for those who sit on a pile of wealth, which they can shift without any responsibility for their fellow human beings.
Alberta’s advantage has always rested with the people who make this province great by working day in, day out. And if we do not spend on those very people when they fall sick or on their children, who are finding it quite difficult to access education with rising tuition fees and textbook costs, then who is this advantage really for?
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