How taxes and regulations keep people in poverty

To a lot of Canadians, our country feels broken.

The betterment of our living conditions over the course of our lives was something a lot of us took for granted, but recent economic headwinds have seemingly pushed it out of our grasp.

This isn’t the first time we have been faced with something like this.

When Ralph Klein became premier of Alberta in the 1990s, he too was faced with a difficult economic and fiscal situation.

The road he took to tackle those issues was one involving deregulation, tax cuts, and a reduction in government spending.

The outcomes—including the improvement of economic mobility for all Albertans—present a path forward for a future federal government looking to turn things around at the national level.

While Alberta is perceived as a low-tax, low-regulation jurisdiction today, in comparison to other Canadian provinces, that wasn’t always the case. When Klein took office in 1992, economic freedom indices placed the province at the higher end, but very much within the pack of Canadian provinces and average American states.

At the time, Alberta was running a $2.6-billion deficit. That’s quite significant given that the province’s expenditures were $16.4 billion back then. The provincial government was essentially borrowing one out of every six dollars it spent.

Klein’s vision was quite clear from the beginning. He argued that the provincial government had a spending problem, not a revenue problem.

Over the next five years, his government would reduce inflation-adjusted spending per person by 32 percent.

Simultaneously, it would lighten the regulatory burden imposed on businesses operating in Alberta, most notably in the energy industry. It would also work to get government “out of the business of business,” as Klein liked to say, by removing a number of government monopolies.

Following these changes, economic freedom indicators shot up in Alberta, separating it from the pack of Canadian provinces and the average American state.

Through empirical analysis, economists have been able to look at the effect these changes had on the poorest Albertans.

Essentially, a dataset was created representing what would have happened if those reforms hadn’t taken place, using a combination of other provinces that did not undergo similar changes. We can then compare this counterfactual, business-as-usual scenario with what actually took place. This isolates the effect of the new policies.

What we find is that getting government out of the way and reducing its influence over Albertans’ lives was of significant help to the poorest in the province.

By 2005, Albertans who were among the lowest 10 percent of income earners could expect their incomes to grow 73 percentage points faster, over the next five years, than they would have without the reform.

Of those, about 12 percent more saw their after-tax income at least double over the same period, compared to the business-as-usual scenario.

As their incomes grew faster, their chances of reaching another income bracket, as opposed to remaining in the same situation, also increased significantly.

On average, those who were in the lowest 10 percent of income earners could expect to jump 8 percentiles further up the income ladder over five years than they would have without the reforms.

Essentially, they were less likely to remain among the lowest-paid 10 percent of Albertans than they would have been without the Klein reforms.

Some might find this counter-intuitive—after all, isn’t government intervention regularly presented as a way to help those who have the least? But the reason is quite simple.

When the Klein government lowered the province’s regulatory burden and reduced its spending, it also allowed a whole slew of new opportunities to emerge.

Where a business idea was once impossible, either because a government monopoly made it illegal or the regulatory burden made it uneconomical, it was allowed to flourish once the legislative barriers were removed.

And where government spending once required a higher tax burden, making some investments less profitable, those same investments became more appealing once those taxes were lowered.

In both cases, there were more opportunities for Albertans, including those at the very bottom of the income ladder. More opportunities mean more ways for everyone to climb up that ladder.

While the rest of the country should certainly take note of how Alberta was able to increase income mobility in the 1990s, so should Albertans today, as the province has unfortunately reverted to being within the pack of Canadian provinces and average U.S. states in terms of economic freedom.

Vincent Geloso is Senior Economist at the MEI and the coauthor of “Pro-Market Reforms Promote Income Mobility: The Case of Alberta.” The views reflected in this opinion piece are his own.

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