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In defence of tax hikes

By: | May 2, 2015

No one likes it when taxes go up, but sometimes it’s for the best.

Tom Baird
A Measured Opinion offers data-based views on social and political issues.

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Provincial Finance Minister Ross Wiseman delivers the 2015 budget in the House of Assembly, April 30, 2015. Photo by Graham Kennedy.

The news this week is that taxes are going up. This has led to a predictable backlash with many declaring the tax hikes unjust.

People are right to be upset. Poor fiscal management by the PC government is going to cause a lot of unnecessary hardship. But tax increases are unavoidable in the face of record budget deficits. In fact, I think we should raise taxes even more. Here’s why:

Giant deficits: Even with these austerity measures, we are expected to run the largest deficit in our history next year and not return to surplus until 2020. This is not just because oil prices crashed — huge deficits were expected even when oil was $105 a barrel. We will have to pay for the colossal mismanagement of the Williams-Dunderdale era, and it is better to get started now rather than let the bills pile up unabated.

A legacy of unaffordable tax cuts: PC tax cuts have reduced government revenue by $744 million per year. This year’s budget will only increase revenue by about $254 million. That means we have only made up for about a third of the unaffordable tax cuts made by earlier administrations. Frankly, I don’t think the tax hikes have gone far enough and I predict we will see even more after the election.

Layoffs in a recession: Despite what Ross Wiseman says, we are in a recession. The budget predicts falling GDP and rising unemployment for the next four years. This is a very different situation than the last austerity budget in 2013, when the economy was still booming. We need to be careful about laying off large numbers of people during a recession, because they will have a much harder time finding a job. For this reason the plan to gradually shrink public sector employment through attrition makes sense, even though in the end it may prove insufficient.

Specific tax changes

The HST hike: The most important change is to increase the provincial portion of the HST from 8 per cent to 10 per cent. This will result in about $200 million per year of new revenue, of which $41 million will be used to enhance the HST tax credit for low-income families (a policy advocated recently by economists at Memorial University).

The HST is often criticised for being regressive (meaning it takes up a larger share of income of poor families than of rich families). While this is true, it is a mistake to view the HST on its own rather than as a part of the larger tax system. For example, the enhanced HST credit will blunt the impact of the tax hike for low-income families and may even make some of them better off. Many other taxes (tobacco tax, gasoline tax, alcohol tax) are as or more regressive than the HST.

The HST also has some important advantages over income tax and corporate tax. It does not affect work or investment incentives, so it will have less impact on economic growth (i.e. on jobs and wages). It’s also harder to avoid paying, since the various loopholes and tricks used to hide investment income aren’t of any use. These reasons help explain why value-added taxes like the HST are so popular in Western Europe where rates of 20 per cent and higher are common.

Axing the Residential Energy Rebate: The Residential Energy Rebate is a program that was introduced in 2011 that rebates the provincial portion of the HST on electricity, heating oil, and firewood for residential customers, costing the government about $40 million in lost revenue. The rebate was justified as temporary relief for households that had seen a spike in home heating costs at a time when the government was running a budget surplus. Now that oil prices and electricity prices have fallen, this rebate doesn’t make sense anymore.

The Residential Energy Rebate is not targeted at poor families and actually provides more money to the wealthy because they tend to use more energy. A lot of people are confusing the Residential Energy Rebate with the Home Heating Rebate, which is a good program that really does target poor families. If the politicians want to help the poor, they should scrap the Residential Energy Rebate and redirect the money into the Home Heating Rebate, or the Low-income Seniors Benefit, or the HST tax credit. The Residential Energy Rebate is a dumb and expensive program that deserves to die.

New tax brackets: The government plans to raise tax rates by 1 per cent on incomes between $125,000 and $175,000 and by 2 per cent on incomes over $175,000, which should generate around $20 million per year in tax revenue. I applaud this measure and have called for a tax hike on high incomes before. However, the size of the tax increase is less than that proposed by me, and by the economists at Memorial University. We could raise rates on high incomes by another 2 per cent and still have the lowest rates east of Saskatchewan. I think we should expect further increases after the election.

No carbon tax:  I have been disappointed by Premier Davis’ delays in putting a price on carbon. I have also been disappointed by reluctance from all parties to embrace this inevitable policy that is sweeping the country.  A carbon tax (like they have in British Columbia) or a cap-and-trade regime (like they have in Quebec and soon in Ontario) could generate as much revenue as the HST hike and would help nudge our province toward a low carbon future.

Response from the political parties

Ross Wiseman and company finally seem to have grasped how dire our fiscal situation is. They of course benefit from a bureaucracy that provides competent advice and can do economic modelling to explore policy options. I am generally happy with their five-year plan, though I think it doesn’t go far enough in some respects.

Liberal leader Dwight Ball’s declaration that he will reverse the HST hike is utterly irresponsible, transparent pandering. Ball’s plan to just keep on borrowing is equivalent to sticking his head in the sand and praying the problem goes away. If he can’t come up with a better plan to deal with the deficit than “diversification”—an almost completely meaningless buzzword—then he has no business in the Premier’s Office.

NDP leader Earle McCurdy has shown encouraging signs of the level-headed pragmatism that often appeared to be lacking in his predecessor, Lorraine Michael. He seems to understand that social services have to be paid for and acknowledges that tax increases are now unavoidable. I am looking forward to hearing more details of the NDP plan.

Conclusions

The reckless spending and unaffordable tax cuts of the Williams administration have left the province in a desperate situation from which it will take years to recover. The proposed tax increases and job cuts through attrition are a responsible step in the right direction. Beware the false promises of feckless politicians claiming otherwise.

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