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Sunday, January 27, 2013

A Problem for Most Countries Today


The following is re-posting from A Better Way Alberta
Although specific to Alberta, it addresses principles applicable to Canada and most countries.

The real problem: Tax & royalty giveaways


The evidence is clear: Alberta does not have a spending problem. The amount of money we spend on public services like education and health care is not excessive.
It's not out of line with other provinces and it's not rising out of control.

So if costs for our public services are under control, and our economy is large and growing, how can we explain the curious (and frankly troubling) fact that the Alberta government continues to record multi-billion dollar deficits?

Alberta has a revenue problem

Since Ralph Klein in 1992, successive Conservative governments have presided over a remarkable series of tax and royalty giveaways that have literally blown a hole in the revenue base that our province needs to fund things like education, health care and other vital public services. Here are the facts:

Fact: Alberta's flat income tax benefits the wealthy
In 2001, Alberta introduced the 10 per cent flat income tax. And its benefits went disproportionately to the wealthy. Albertans earning more than $250,000 a year saw their provincial income taxes drop 24 per cent. But the amount of taxes middle-income earners paid were virtually unchanged (Source: Alberta Federation of Labour, "Alberta's Flat Tax puts Vital Public Services at Risk").

Fact: Flat tax cost us $1.5 billion in first year.
By the Alberta government's own estimates, the flat tax resulted in a loss of $1.5 billion to the provincial treasury in the first year alone. The losses of potential revenue have grown every year with Alberta's growing population (Source: Government of Alberta, "Alberta's single income tax rate lowered to 10 percent").

Fact: Alberta has 25 per cent of Canada's high-income earners.
Alberta is home to 25 per cent of all Canadians earning more than $500,000 per year, even though we only have 10 per cent of the country's population (Source: Alberta Federation of Labour, custom tabulations using Statistics Canada's Social Policy Simulation Model and Database).

That means Alberta has a large population of high-income earners who continue to pay ultra-low taxes thanks to the flat-tax giveaway.

If we returned to a progressive tax system similar to what existed in Alberta prior to 2001, those high-income earners would pay a fairer share of taxes in the province and help eliminate Alberta's current budget deficit.
BWA chart percentage-share-cdn-500k-earners

Fact: Alberta could collect $11 billion more in taxes and still have the lowest tax rates in Canada.
According to the government's own calculations, an extra $11 billion in revenue could be generated every year if Alberta had the same tax structure as British Columbia, the province with the next lowest tax rates (Source: Government of Alberta, 2011 Budget).

If we taxed at rates slightly lower than B.C., we could get rid of the province's current $3.05-billion deficit and have $8 billion to spare!

That's billions to invest in better services, needed infrastructure, and to save in our rainy day Heritage Savings Fund.
BWA chart ab-tax-advantage

Fact: $2 billion every year to corporate profits.
Alberta has cut the province's general corporate tax rate from 15.5 per cent in 2001 to 10 per cent today. The government estimates each 1 per cent cut in the provincial corporate tax rate represents a loss of $350 million to the treasury (Source: Government of Alberta, 2011 Budget).

Returning corporate tax rates to pre-2001 levels would generate nearly $2 billion additional revenue annually.
BWA chart prov-corp-tax-rate

Fact: Corporations have successfully lobbied for lower taxes.
Between 2005 and 2011, the combined provincial/federal tax rate on corporate profits over $500,000 was slashed from 33.6 per cent to 28 per cent. The Harper government in Ottawa wants to reduce it to 25 per cent by the end of 2012, significantly lower than the rates in other western industrial countries. That loss in revenue means less money for essential public services for you and me (Source: Government of Canada and Alberta, Budget documents 2005 to 2011).
BWA chart combined-corp-tax-rate

Fact: Alberta government failed to meet its own targets for royalty collection.
Royalties are not taxes. Instead, they are the price that companies pay for the opportunity to develop and sell natural resources that are owned by the public. In order to calculate royalties, the government first looks at what economists call resource "rent," which is the surplus wealth left over after the developer has paid his costs of production and taken a competitive level of profit (about 15 per cent). Royalties are the way that governments collect these rents or surplus value.
In many jurisdictions around the world, governments—as the owners of the resource—take all the surplus value. They justify this on the grounds that the developer has already made a competitive profit.

But here in Alberta, the government is much more generous with developers: the government's target is to collect between 50 and 75 per cent of rents, leaving oil companies and other resource developers with huge windfall profits over and above their normal, competitive profits.
However, a recent study from the Parkland Institute at the University of Alberta shows that the Alberta government only managed to reach its minimum target of 50-per-cent rent collection twice over the past decade and never came close to reaching its higher target of 75-per-cent rent collection.

How much money did the Alberta government leave on the table to be scooped into the pockets of big energy corporations? Based on the Parkland Institute's calculations, the Alberta government could have collected $37 billion more in royalties over the decade if it had actually met its own minimum collection target (50 per cent of rent) and a whopping $65 billion more if it had met its maximum target (75 per cent of rent).
An extra $37-65 billion would have transformed Alberta government's financial situation dramatically, giving it an almost endless range of options for investment and/or saving.
BWA chart rent-percentage-by-year

BWA chart revenue-lost-by-not-max-share-of-rent

Fact: The government's share of total market value of our energy resources has dropped from 40% to 10%.
A study from the University of Alberta's Parkland Institute shows the government's share of the total market value of combined oil, gas and oil sands development was about 40 per cent under former Premier Peter Lougheed.

Lougheed raised royalties and more vigorously pursued collections without any negative effects on the Alberta's economy or investment climate
But under the government of Premier Ralph Klein, the public's share of the pie was halved to about 20 per cent, and under Ed Stelmach it dropped to a paltry 10 per cent, the lowest level in Alberta history.
We're the owners of this resource. How can we allow our government to fail us so badly? Low royalty rates and the government's dismal record of actually collecting those royalties means our share of the province's energy wealth has plummeted.
BWA chart govt-share-total-mv-combined-oil-gas
Source:  Parkland Institute, "Misplaced Generosity"
Fact: Royalty giveaways created deficits, not jobs.
In 2009 and 2010, $2.8 billion was spent on the so-called Drilling Stimulus Initiative. The program's goal was to encourage more oil and gas drilling during the recession.
But a  July 2011 investigation conducted by the Alberta Federation of Labour shows that no jobs were created by the program. Instead, the money seems to have been used almost exclusively to pad corporate profits. The program was also extended into 2010, even though oil prices had recovered and investment had rebounded.

If the stimulus had not been extended in 2010, the government would have been able to balance its books that year. The deficits of 2009 and 2010, which were used to justify cuts and freezes to things like education, universities and colleges, were entirely created by a royalty giveaway that created no jobs.

So what does all of this mean?

It means the Alberta government's budgetary cupboard is bare because politicians have made it bare through a long series of irresponsible tax and royalty giveaways.

If the Alberta government levied taxes at a rate closer to the Canadian average, if it implemented a slightly more aggressive royalty system, and if it stopped giving massive handouts to already successful industries, then Alberta's deficits would quickly be replaced by surpluses.
Bottom line, Alberta can afford top-quality services and world-class infrastructure. We can also afford to dramatically increase our savings at the same time. But none of this will be possible until the Alberta government stops giving a free ride to wealthy corporations and high-income individuals.
The real solution is progressive taxes and royalty reform. Help us spread the word. Join our campaign.