Do tax cuts help create investment?
Roughly speaking, trickle-down economics is lowering taxes on wealthy individuals and businesses, hoping they will invest more money in communities.
The UCP won the 2019 election on promises to lower taxes and cut spending to kickstart the economy. However, their controversial 2019 budget has the opposition NDP calling the tax cut “a gift to corporations” that hurts Albertans.
For most people, it’s hard to evaluate directly conflicting claims made by both parties. This rhetoric seems to be contributing to increasing polarization in Alberta politics.
We solicited University of Calgary associate professor of economics Trevor Tombe to discuss the nuances of this complex political discussion.
It turns out this debate is more complicated and multi-faceted than either party’s oversimplified political messaging would let on.
Does trickle-down economics increase investment?
When evaluating the effectiveness of tax cuts with the goal of increasing investment, Tombe believes the first question we need to ask is “will this policy increase investment?” According to Tombe, the answer is “probably.”
“There is a lot of evidence that shows there is a link between amount of tax on income and the amount of investments you get,” said Tombe.
Tombe notes the NDP also used tax policies while in office with the same goals. For instance, the NDP government created the Alberta Investor Tax Credit in 2016. They designed it to increase investment by way of lowering taxes on investment.
“The prior NDP government also enacted policies to lower the tax on investment, they’ve just chosen a different policy instrument to do so.”
However, Tombe believes the debate shouldn’t stop here. There are several important considerations that Albertans need to evaluate before we can pass judgement on this budget.
Trickle-down economics and trade-offs
“There is no policy that doesn’t come with trade-offs,” said Tombe.
Something people need to consider is what the government could have done with the money used for the tax cut.
According to Tombe’s research, the Alberta government will take in $1 billion less tax money per year because of the UCP’s Job Creation Tax Cut.
“In that sense, there’s a trade-off, in that those dollars could’ve been used in other ways,” said Tombe. “Debating the costs and benefits of alternative uses is entirely valid and appropriate.”
Another factor is time. According to Tombe, the time required for these policies to have real effects would be almost 4 years.
He cautions people to avoid reacting to immediate job losses or gains and tying them to the Job Creation Tax Cut. One recent example of this is the anger people have directed at Encana for moving its head office out of Calgary. Another is the anger at Husky Energy for hundreds of layoffs despite the tax cuts.
“It takes some time for these rate changes to manifest themselves into business decisions,” said Tombe. “In the short term, we really shouldn’t be trying to draw any connection yet.”
Also, there is the consideration of how companies will use this tax cut.
Will companies take the money from the tax cut and invest those dollars in Alberta by building factories or hiring employees?
Or will they choose to accept the tax benefit as a nominal gain, and not invest further money in the province?
Provincial sales tax possibilities
Another problem with the current debate is the lack of discussion about legislating a sales tax. People widely consider it a plausible solution that could help Alberta’s financial situation without huge spending cuts.
The UCP used the MacKinnon Report on Alberta’s Finances to rationalize spending cuts. However, the report only explored cuts as a strategy to balance the budget. They were not permitted to look into implementing a sales tax.
“If we want to increase spending in other areas, we don’t need to fund it with a corporate income tax. We can fund it with a sales tax, and that should be part of the conversation too,” said Tombe.
Ultimately, Tombe believes having a robust public debate detailing the pros and cons of different spending priorities mixed with a debate about different revenue sources should be “what budget debate should focus on.”
Unfortunately, what citizens are getting now is two parties throwing mud and dividing the population, instead of a nuanced discussion about the real benefits and downsides of government policy that affects everyone.