The key to income tax freedom is centered around controlling politicians.
Alberta balanced its budget only after a law was passed which took away the discretion of the government of the day to run a deficit. Alberta started making rapid progress on debt repayment only after a law was passed that requires 75% of a surplus to go towards debt repayment. Without those laws, nothing would have stopped politicians from continuing to push our province further and further into debt. And without those laws, politicians might have spent more of the surplus than they already have.
Alaska's Permanent Fund is an example of what can be achieved when laws limit the discretion of politicians. Started in 1976, Alaska's Permanent Fund has over $27 billion (US) in assets, and pays an annual dividend of $2,000 (US) to every man, woman and child, in a state without sales tax or income tax. By law, at least 50% of oil revenues must be put into the Fund. By law, an amount is added to the Fund's principal each year to keep pace with inflation, so the Fund's value is not eroded over time. By law, the Fund's annual income does not become part of the government's general revenues. By law, politicians must obtain the approval of voters in a statewide referendum if they wish to spend any portion of the Fund's principal, or to change the Fund's mandate.
Also started in 1976, Alberta's Heritage Fund has assets of $12 billion (Cnd), compared to about $40 billion (Cnd) in Alaska's Fund. Alberta has five times as many people as Alaska. Why have Albertans, per capita, saved up only 6% of what Alaskans have saved Why do Albertans still pay income tax when Alaskans don't
The main reason is that Alberta's politicians have unfettered discretion over the Heritage Fund. The Fund has no specific mandate, purpose or goal. Its vague mission is "to provide prudent stewardship of savings from Alberta's non-renewable resources by providing the greatest financial returns for current and future generations." Nothing requires politicians to put 50%, or 20%, or even 1% of oil and gas revenues into the Fund. Politicians are not required to "inflation-proof" the Fund, which is worth less today than in 1987. Nothing stops politicians from using the Fund to prop up pet projects under the old ruse of "regional development." Politicians can take billions out of the Fund to put into losing businesses in the name of "economic diversification."
According to University of Calgary economist Dr. Jean-Francois Wen, if 50% of oil and gas revenues are put into the Heritage Fund, Alberta can achieve income tax freedom by 2015. Once the Fund has grown to about $55 billion, it will produce enough income each year, so that Albertans will no longer have to pay personal income tax.
But the goal of income tax freedom will not be achieved if politicians keep their unfettered discretion to spend the Heritage Fund's income and principal as they see fit. Alberta balanced its budget and now approaches total debt freedom because laws restricted the discretion of politicians. In the same way, Alberta's laws must protect the Fund from arbitrary political discretion. The Fund must be given a specific mandate or goal, and laws must be passed to ensure that that goal is reached. As we've learned from the Alaskans, income tax freedom won't happen by accident.