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Nova Scotia Tax Review: Eroding Tax Fairness

November 20, 2014

5-minute read

The Nova Scotia Tax Review released today lacks an analysis of the impact its tax changes will have on Nova Scotians. Who would benefit? A simple distributional analysis of different income groups would give us some information. Not available. (Informative to check out the analysis we did for the Hamm government’s proposed cuts back in 2003 – by income level & by gender and county.)

What is the anticipated effect of the tax changes on the economy? How many jobs might be created by this tax package? There is no evidence in this report on either of those. What can be said based on what we know about the problems facing the province, the current tax regime and the impact of taxes and government spending on the economy?

On balance, the tax package proposed in this report will result in a regressive and unfair tax regime in Nova Scotia that will harm the economy and make current problems worse. I offer four reasons why below.

First, the shift toward consumption taxes over income taxes disadvantages those struggling to make ends meet. Here is the idea behind this recommended shift: consumption taxes are fairer because those who spend the most, pay the most. In theory, that is true. In reality, how you are affected by these taxes very much depends on how much or how little disposable income you have to make spending choices. It also means therefore, that those who have less income pay proportionately more of it on sales tax for the things they need, than do those who have more income.

Consumption taxes are set as a flat rate, which means everyone pays the same rate when they purchase something. In contrast, income tax is progressive and fair because the rates rise as income rises; those who have more income, actually contribute more in taxes. It is a way to level out some of the inequalities in our society.

Even if the government was to increase the Affordable Living Tax Credit and the Heating Assistance Rebate Program (HARP) to somewhat offset broadening the consumption tax, broadening it would still disproportionately hurt the poorest among us and the working poor in particular (given how low your income has to be to qualify for these rebates/credits.) In addition, where will people find the money to pay for these things in the first place?

Government is advised to, on the one hand, “support the working poor and poor families with children,” and on the other hand, freeze program spending and increase tax on diapers, books, and children’s clothing?

This review did a poor job of connecting the dots, or a good job at hiding the full impact that would have been revealed by those connections.

Second, the income tax changes proposed would benefit the top income earners the most because our current system is progressive in its design—the more income you make, the more you pay. However, this also means that the more you pay in taxes, the more benefit you will get. The review says this about raising the personal exemption  - as if it is a good thing: “the lowest income will benefit proportionally”. To be clear, that means the rich will benefit more from an increase in the personal exemption, as will men who make higher incomes than women. Raising the personal exemption from $8,481 to $11,000 would cost $112 million per year.

The most regressive part of this package is arguably the recommendations to “eliminate the fifth income tax bracket (21% on earnings over $150,000); simplify the system by merging the third and fourth brackets, setting the rate at 17%.” This will mean the richest among us will get to keep $72 million annually in tax relief, which they are more than likely going to save (in tax free savings account or to top up RRSPs to be eligible for further tax breaks).

Add to the personal income tax cuts, the suggested tax cuts for corporations and it is clear who will benefit from this package. Why would a government raise small business tax rate in order to lower the general corporate income tax rate (from 16% to 13.5%)? Apparently, this is an incentive to grow your business.

Third, tax cuts are not a responsible policy tool to promote economic growth: they are actually the riskiest possible measure. Remember, corporations in Canada are already sitting on a hoard of cash (some $630 billion!). So, now corporations in Nova Scotia can sit on their own hoard of cash too? We need policy that is based on evidence, not wishful thinking.

If you want to stimulate the economy, the way to get the best bang for your buck is to invest in public infrastructure and in housing or in education and health services, and to put income in the hands of those who need it the most. In addition to the effect on growth and jobs created, the benefits will be spread more widely.

We all do well if we reduce poverty as a community - it costs more to help people manage to scrape by in poverty than to prevent poverty and lift people out of it. Employers benefit from more skilled employees, and from better communications and distribution infrastructures which widen the markets for their products.

Fourth, somebody has to pay the price for tax cuts: this time that burden would fall on Nova Scotians who rely on public services. That is all of us. In addition to significant tax cuts for the rich and corporations, the review recommends “holding the line on government spending.” Given inflationary pressures alone, freezing spending means cuts will be necessary. Based on a significant body of evidence, any austerity program will result in a drag on fiscal performance and thus will result in even lower revenue down the line. Starving government of revenue will make things worse for those Nova Scotians waiting for home care, long term care, affordable housing and childcare. The list goes on.

In addition, it seems we can expect higher user fees as well – user fees are just another regressive flat rate form of taxation that disproportionately affects lower income people. The review recommends basing fees on what it actually costs to deliver the services provided. An increase in fees is especially likely since our government will have less revenue to actually fund public services. Should the government choose to introduce additional fees and increase existing charges, the accessibility of these programs is threatened.

Status Quo is unacceptable

The current tax system needs to change to move Nova Scotia forward. A tax system based on principles of justice and fairness would strengthen our economy and our society as a whole. The tax system is a public policy tool that can help address income and wealth inequality and women’s inequality, and can help reduce poverty. Why not tackle the inequity that exists from only taxing 50% of capital gains? Why not recommend an inheritance tax? (The carbon/pollution tax requires consideration – it should be revenue neutral but the details in its design must be more carefully thought out.)

The tax system needs to change to ensure that all Nova Scotians have access to high quality public services. Instead of addressing existing issues, the recommendations in this review will exacerbate current inequalities, undermine public services and result in more economic and social injustice. None of this will help the youth of this province, who the review claims will be big beneficiaries from the tax cuts. It especially won’t help them because it does not “chart a path for growth” that will result in the creation of new good jobs. Indeed, it is more likely to impede growth, and, combined with public spending freezes, result in job loss. Exactly the wrong path for Nova Scotia.

Christine Saulnier, PhD is the Nova Scotia Director of the Canadian Centre for Policy Alternatives.

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