From the Fraser Institute

By Lennie Kaplan

During the mid- to late-1990s, Alberta taxpayers lost more than $2 billion from these failed loans, guarantees and share purchases in major business projects.

Remember the old adage from the writer and philosopher George Santayana that “those who cannot remember the past are condemned to repeat it.”

At a recent Calgary Chamber of Commerce event, Premier Danielle Smith indicated the Alberta government is looking at using Heritage Fund assets “to assist in de-risking projects that were finding it difficult to get financing.” This signals a return to the Alberta government’s industrial policy of the 1970s and 1980s of being in the business of being in business and government picking “winners and losers” as Premier Klein famously said.

A remembrance of the past is in order, so we aren’t condemned to repeat it. Between 1973 and 1992, the Alberta government took a very active role in cultivating economic development. The approach was highly interventionist and involved direct financial assistance through direct loans (even ones issued though the Heritage Fund), loan guarantees and share purchases. The risks attached to these transactions, particularly in a highly cyclical and volatile economy such as Alberta, were significant, generally unknown at the outset, and largely open-ended.

Sure, there were some notable exceptions, but the high degree of risk of direct intervention in the private sector was illustrated by the fact that during the mid- to late-1990s, Alberta taxpayers lost more than $2 billion from these failed loans, guarantees and share purchases in major business projects.

Most notable were losses incurred on such high-profile business projects as Novatel Communications ($556.0 million), the Lloydminster Bi-provincial Upgrader ($392.5 million), the Millar Western Pulp Mill ($244.2 million), Gainers ($208.3 million), the Magnesium Company of Canada ($164.0 million) and the Alberta-Pacific Pulp Mills ($155.0 million).

The premier makes a valid point that financial markets may be averse to financing large business projects because of the risks associated with intrusive federal climate change policies and regulations. Thus, the argument is there’s a need for the provincial government to get involved in financing market failures in the capital markets.

However, from our remembrance of the past practises, raiding the Heritage Fund to pick “winners and losers” is the wrong prescription to solving this problem. Let’s use the tried and true policies of cutting taxes and streamlining regulations to attract more investment capital to Alberta to support business projects. And let’s focus on building a Heritage Fund of $250 billion to $400 billion that will help secure our province’s fiscal and economic future and the future for our children and grandchildren.

Author:

Lennie Kaplan

From the Frontier Centre for Public Policy

By Ian Madsen

Business groups are justifiably opposed to the federal government’s June 25 increase of the inclusion rate for capital gains tax. But there is another corporate income tax increase looming. It will come in the form of a 2018 corporate tax reduction that is set to expire starting this year. Ottawa ironically intended it to make Canada more competitive amid the 2018 tax reform and cut in the United States.

According to a study by Trevor Tombe at the University of Calgary’s School of Public Policy, Canada’s corporate income tax rate on new investments will jump from 13.7 percent to 17 percent by 2027. Even worse, for Canada’s high-value-added manufacturing sector, taxation will triple. Higher corporate income taxes, in a nation experiencing difficulties in encouraging domestic or foreign investment in new plant equipment, will struggle to reverse meagre productivity growth—a problem noted by the Bank of Canada.

Heavier taxation will hinder future improvement in incomes and the standard of living, making it a serious issue. Increasing income tax on businesses and investment will not increase prosperity and personal income. The legislation to make the 2018 provisions permanent is, alarmingly, not urgent to politicians.

At least one policy could make Canada more attractive to business, investors, and hard-pressed ordinary citizens. It would be to slash corporate income taxes substantially.  Another is to make paying taxes easier, as Magna Corporation founder Frank Stronach suggested. It may surprise some Canadians, but Ottawa’s take from corporate income taxes is a relatively small. However, it is a fast-rising proportion of federal overall revenue: 21 percent in fiscal 2022–23, according to the government, up from 13 percent in fiscal 2000–21, notes the OECD.

Letting companies pay taxes and reducing the tax burden on ordinary people might seem OK to some. However, what happens is that every corporate expense, including taxes, reduces cash flow that reaches individuals. The money remaining in the hands of businesses could either be reinvested or paid out as dividends to owners. Let’s remember that owners are founding families, pension fund beneficiaries (employees, citizens), and ordinary individuals.

As there are fewer available funds, there will be a reduced capacity for capital investment. Investment is required to replace existing equipment, or add new equipment, devices, software, and vehicles for businesses. It only keeps companies competitive and makes employees more productive. This, in turn, makes the whole economy more profitable, thereby increasing taxes paid to governments.

As for the questionable reason for the tax increase, aiming to generate more revenue, recent experience in the United States is informative. The 2017 Tax Cut and Jobs Act reduced corporate income tax from 39 percent of pre-tax income to 21 percent. It resulted in U.S. federal corporate income tax revenue rising 25 percent from 2017 to  2021. Capital investment  rose dramatically too, by 20 percent, a key goal of many Canadian policymakers.

Until recently, the Republic of Ireland had a corporate income tax rate of 12.5 percent, a key selling point in its successful efforts to attract foreign investment over the past several decades. Ireland, with few natural resources, is one of the richest and fastest-growing of the OECD nations, despite a bad real estate crash 15 years ago. Near the lowest in the OECD in tax burden, it nevertheless has a high quality of life and services.

If anything, Canada should cut corporate income taxes to below the levels of its main trading partners and rivals. To do so, it will have to extricate itself from the ill-conceived international treaty that compels signatory nations and territories to have a floor rate of at least 15 percent of pre-tax income.   Ottawa seems enamoured of multinational agreements and organizations, so it may be highly reluctant to abrogate membership in this growth-dampening arrangement. The statutory federal corporate income tax rate in Canada is 15 percent, but all provincial governments impose their own levies on top of that, ranging from 8 percent in Alberta to 16 percent in Prince Edward Island.

By cutting taxes, we can pave the way for a brighter economic future, marked by increased productivity and the prosperity we all yearn for. This move will also ensure our international competitiveness, a goal we are currently struggling to achieve with our current 25 percent rate (OECD).  Canada has a hard time attracting investors. Raising taxes will neither attract more of them nor encourage more investment from existing Canada-domiciled entrepreneurs and companies.

Ian Madsen is senior policy analyst at the Frontier Centre for Public Policy.