Tax breaks and free riders

While Klein is whining about the prospect of another NEP, the Globe points out that he's also trying to make gains at the expense of the rest of Canada:

Mr. Klein argued that his government is being prudent with its windfall and that he favours using cuts to both corporate and personal income taxes in the future to keep attracting workers and investment to Alberta...

Recently, the Canada West Foundation, a western think-tank, warned against that strategy 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.

Apparently the interrelatedness of Canadian provinces is completely lost on Klein just as it is on the Ontario Chamber of Commerce. Klein makes it clear that he fully expect other provinces to have to pay more to keep up, whether by trying to reduce tax rates to similar levels or by offering subsidies and public financing. However, he believes that Alberta shouldn't bear any obligation to address the national consequences of its proposed policies. Per Klein, the federal government should not only ignore the oil and gas money now pouring into Alberta, but also do nothing if Alberta uses that money to the detriment of the rest of the country.

That makes no sense in a federal system, particularly one with an equalization system as exists in Canada. If the known effect of Alberta's policies is to cause harm to other provinces, then it should rightly be obliged to pay added equalization out of any gains acquired at the expense of the rest of the country. And even from the most ardent pro-business angle, there should be little doubt that the presence of a tax haven distorts the natural flow of business to the detriment of other jurisdictions.

To clarify, that doesn't mean we should be looking at federal controls over energy, or indeed any policy with the effect of harming Alberta's economy; that would be doing to Alberta exactly what it's threatening to do to the rest of the country. Nor does it mean that unemployment and growth can or should be forcibly evened out between regions.

But the equalization system is designed to ensure comparable levels of services across the country. That should also mean a relatively low degree of difference in the capacity of provincial governments to stimulate job growth, whether through tax cuts or public investments. The outcomes may vary, but at the very least the opportunities shouldn't be radically different.

It's bad enough that Klein plans to throw that entire system out of balance; it'll only be worse if the federal government allows him to avoid the consequences of that plan. We have bigger issues to fight with foreign free-riders; the last thing we need is a similar dispute internally.