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Don't Let Mythical Thinking on Taxes Mess Up Alberta

03/04/2014 05:31 EST | Updated 05/04/2014 05:59 EDT

As Albertans approach another provincial budget, the usual fables about Alberta's finances often crop up. To inoculate ourselves in advance, let's ponder two myths.

Myth number one: "Alberta's wealth is a result of luck."

This tall tale assumes that the existence of natural resources automatically results in wealth creation, jobs, and a higher standard of living. That's hardly the case. Plenty of jurisdictions have little in the way of natural resources but prosper, while others have plentiful natural resources yet flounder.

Resource poor city-states such as Hong Kong and Singapore have done well on multiple measures of wealth creation. They score well on the knock-off benefits of employment, a high standard of living and moderate tax levels, and even government revenues that accrue for education, health care and the like.

By contrast, resource-rich (but poverty-ridden) Venezuela has lots of oil. What it doesn't have are many people that beat a path to its door to invest or a high standard of living (and the two are connected). To use one measurement: Investor perceptions about the desirability of doing business there are the worst in the world according to the Fraser Institute's annual global petroleum survey. (Oklahoma tops the list.)

The causal difference between a prosperous jurisdiction and a poor country is found in the strength of its formal and informal institutions and in government policies on multiple matters: property rights, taxes, sound money, freedom to trade, regulation and the rule of law. All help or hinder a society's prosperity.

Such policies matter because, as the Peruvian economist Hernando de Soto once wrote, assets alone do not change behaviour: "They do not produce incentives, they make no person accountable, no contract enforceable." Whether land, a factory, or resources, it takes proper, clear and enforceable rules and a modest tax regime for people to do something with such assets. Otherwise, such possessions are merely what de Soto called "dead capital."

Point is, Alberta didn't just get "lucky." Over the decades, the provincial and federal governments (whose policies also obviously affect Alberta) have created or kept policies that allow people to invest a buck and make a profit.

In connection with the above, let's investigate Myth number two: "Alberta is undertaxed."

According to British Columbia, that province actually has the low-tax advantage for incomes under $100,000 (though the tax edge is only for singles). Alberta still has the advantage with other examples and overall because of a lack of sales tax, property transfer tax and other British Columbia tax zingers.

According to the Alberta government, if Albertans paid the same level of taxes as the next lowest province in Canada (British Columbia), combined we'd pay $10 billion more every year.

Some have interpreted this figure to mean Albertans are undertaxed. But to capture another $10-billion, and assuming no effect on behaviour (good luck there), the province would have to more than double personal income taxes (worth $9.6 billion last year), or raise royalty rates by 132 per cent (worth $7.6 billion). Or jack up business taxes by 208 per cent (worth $4.8 billion).

Comparisons aside, the tax-us-more argument has a big blind spot, which is that the provincial government already spends plenty.

Alberta's per person program spending--not capital spending but program spending alone--is near an all-time high. In the last fiscal year, 2012/13, and adjusted for inflation, the province spent $10,564 per person on programs. That is not as nose-bleeding as the $11,905 spent per person on programs in 1985/86, but it is 57 per cent higher than the lowest per capita amounts seen in the mid-1990s.

Even with reference to more recent years, that $10,564 is higher, by nine per cent, than the pre-recession figure in 2006/07 when Alberta's government spent $9,690 per person. But that was back when Alberta's treasury was bursting at the seams with boom-time natural resource revenues.

The tax-happy crowd miss an obvious point: Alberta's relatively lower tax haul and historically friendly pro-entrepreneur attitude is precisely why the province prospers. It is why Alberta, routinely, has one of the lowest unemployment rates in the country, and this despite having the highest in-migration rate and the highest labour force participation rate.

Those who think Alberta can "afford" to raise taxes neglect something else: People don't move to Alberta for the weather or the beaches. They move here for opportunities, ones linked to entrepreneur-friendly policies and others on investment and taxes. So whatever rhetoric one hears over the next few weeks, cratering such a solid foundation is the last thing any sensible Albertan, from the politicians on down, should desire.

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