Crawl Across the Ocean

Friday, August 26, 2005

Collective Action Problem of the Day

I just thought I'd mention this article from the Globe today, "Klein Steps Up Sabre-Rattling on Oil Revenue".

I find it somewhat odd that Albertans feel it is totally natural that oil rich parts of the province should share their wealth with the rest of the province but that Alberta shouldn't share the wealth with the rest of the country. It's funny which particular lines on a map people choose to align themselves with.

But leaving that aside, the more interesting part is,
"Recently, the Canada West Foundation, a western think-tank, warned against that strategy [slashing (corporate) taxes] for fear it would disrupt the Canadian economy and set up Alberta as a "tax haven in the federation."

Mr. Klein said that concern is unfounded because other provinces could keep up to Alberta by using incentives such as subsidies and loan guarantees.

"The only incentive we have to sustain economic growth and prosperity is to have a very competitive tax regime," he said."


Its not interesting because of Klein's idiotic statement which I doubt even he believes or expects anyone to believe, but because the situation reveals another collective action problem. Corporations have the ability to set up in whichever province they choose and can move from one to another relatively easily. If oil revenue allows one province to cut its corporate tax rates below that of the others, then corporate offices will move there making an already unequal distribution of wealth even more unequal, not to mention reducing the effective corporate tax rate in the country below the average of what the people want it to be.

If you ask me, the provinces shouldn't even be collecting corporate taxes in the first place, this should be a strictly federal tax (and in the future, a global tax, but that's another story). Of course, getting Quebec and Alberta to agree to such a plan might be difficult, but the federal government could act unilaterally. It would simply announce that it was planning to raise corporate tax rates by, say 10% and lower personal tax rates accordingly so that the change was revenue neutral. It would then publicly invite provinces to remove their corporate taxes and raise personal taxes to offset this move. It would be in the interest of have-not provinces which have trouble competing on the corporate tax rate front to accept this offer, and once a few provinces had accepted and reduced their corporate tax rates to 0, the others would be forced to go along (or suffer).

In this way, the (federal) government could make the collective action problem work in its favour. This would serve the interests of Canadians (assuming that the people do want to collect corporate taxes which I think is a fair assumption), prevent unnecessary and destructive inter-provincial competition, and would also be much more efficient for corporations only having to pay taxes to only one level of government and for government having one corporate tax collecting infrastructure instead of 11.

A side benefit is that it makes more sense for corporate tax revenues, which are more volatile than personal revenues to be aggregated up to a higher level at which some of the volatility would cancel itself out (e.g. the Ontario based financial industry might do well in a year the Alberta based energy industry does poorly and vice-versa) and at a level where the government is in a stronger, more flexible (in terms of annual expenditure) fiscal position.

So what do you think the chances of the Liberals undertaking this plan are?
a) 0
b) 0
c) 0
d) All of the Above
e) Don't be silly, Paul Martin would never consider this plan.

Of course Stephen Harper and the Alliance have a grand plan of decentralizing things as much as possible, and I suspect that in all their years of thinking about policy, the concept of the collective action problem (i.e. the purpose of centralization) seems to have eluded them, so you could consider the Liberals the lesser of two evils here. Still, I'm not big on voting for evil.

1 Comments:

  • "I find it somewhat odd that Albertans feel it is totally natural that oil rich parts of the province should share their wealth with the rest of the province but that Alberta shouldn't share the wealth with the rest of the country. It's funny which particular lines on a map people choose to align themselves with."

    It is indeed odd. The concept that one province has the sole right to all mineral wealth within it, regardless of the needs of the rest of the country always struck me as so much nonsense. It has created bizarre disparity across the country, when in fact all Canadians should have access to the bounty of their country, regardless of their place of residence.

    But then, I also supported the National Energy Policy (and continue to do so), so maybe my judgment is suspect.

    By Blogger Timmy the G, at 2:45 PM  

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