nb-promo-craig-brett

At the risk of having my mouth washed out with soap, I am going to talk about a dirty word: taxes.

I think they are going to go up, perhaps not during the mandate of the next government, but they will go up. It is time for a reasonable debate over which ones and how much.

At the aggregate level, taxes do two things. They provide revenue for governments and they affect economic behavior.

On the revenue side, New Brunswick government has budgeted to collect over $3.1 billion in taxes this year. This amounts to less than 11.5 per cent of what New Brunswickers produce.

If you add in fees and other provincial revenue sources, it collects just under $4 billion, or slightly less than 15 per cent of provincial output.

By comparison, the province has plans for roughly $7.3 billion in ordinary spending. The difference is made up by $2.7 billion in grants from Ottawa, and, after some adjustments to the capital account, the nearly $750-million deficit.

Personal income taxes and the Harmonized Sales Tax each account for roughly one third of estimated tax collections for 2010-2011. Provincial property taxes account for about 13 per cent, while fuel taxes and corporate income taxes account for about a six per cent each.

If tax increases are to be a significant component of a strategy for the New Brunswick government to cover its expenses, there are two options: increase taxes that currently raise a lot of money by a moderate amount or increase taxes that currently collect very little by a lot.

Gradualism suggests that personal income taxes and the HST are natural targets for increases. More radical would be a carbon tax or a hefty rise in either property or corporate taxes.

Changing behavior

Turning to behavior, when you tax something it becomes more expensive. To the extent that they can, people turn away from the expensive items and turn toward cheaper alternatives.

This is a cause for concern for two reasons: people are no longer doing what they most prefer and the tax base erodes, making the tax less effective at raising revenue.

From an aggregate point of view, the best taxes are those that raise the most revenue with the least changes in economic behavior.

On this basis, economists usually argue for broad-based taxes rather than those that are targeted to particular goods or economic sectors. These are the most difficult to work around, and so people pay them without causing too much damage to economic activity.

This consideration argues against special exemptions for or preferential treatment of particular industries.

So the real choice is among the broad-based taxes, and a government might reasonably want to rely most heavily on the ones that are least distorting to economic behavior.

Most of the evidence from around the world suggests that the corporate income tax is the most distorting, followed by personal income taxes, broad-based consumption taxes like the HST, and finally property taxes.

Unfortunately, there is some disagreement on just how distorting each tax is and I am not aware of any good studies that provide this type of information for New Brunswick.

If income taxes are only a little bit more distorting than the HST then there is little to choose between the two when deciding on which is the better vehicle for financing public services.

Ending tax myths

Before going any further, I have to dispel a comforting myth. If increasing taxes damages economic activity then cutting taxes should encourage economic activity.

So isn’t it possible that tax cuts can stimulate the economy enough that the taxes on the new economic activity outweigh the initial losses from the tax cuts? Yes, this is a theoretical possibility. Alas, it is only theoretical.

'Given the relatively small amount of money that corporate taxes currently raise, there is no great threat to public services involved in cutting corporate taxes in the hope of reaping the rewards of potential stimulus.'— Craig Brett

If this myth from supply-side economics were true a politician could have it all, tax cuts and more money to spend. Given this picture, do you think that some politician would not have cut taxes already?

And on this issue, the evidence is overwhelmingly on the side of common sense. A government simply cannot have its tax cuts and spend them too.

There is a glimmer of hope for the supply-side myth in the case of corporate taxes. This is the only tax for which I have seen any plausible evidence that tax cuts might, I repeat might, be self-financing.

Given the relatively small amount of money that corporate taxes currently raise, there is no great threat to public services involved in cutting corporate taxes in the hope of reaping the rewards of potential stimulus. But I still wouldn’t pin my fiscal hopes on corporate tax cuts alone.

But people care about more than just how much revenue is raised and the damage that might be done to economic activity.

They are concerned about exactly who ends up paying for government. I suspect that most people would like to see the more fortunate pay more, or least that the poorest of families be sheltered from the greatest tax burdens.

By their very designs, it is much easier to shield the poor from increases in income taxes than it is to protect them from HST increases.

Corporate tax increases risky

Where does all this leave the province? Increasing corporate taxes is risky from a growth point of view and any reasonable increase in that tax is not likely to make a significant dent in the deficit.

I suspect that there is little appetite for increases in property taxes. Besides, there are issues surrounding the allocation of the property tax base between the province and municipalities and its treatment of different classes of property that need tending to before we can suggest using property taxes to balance the books.

That leaves the old standbys, the HST and personal income taxes, to do the heavy lifting.

Based on the information I have today, I think that a reversal of the recent income tax cuts is a sensible and fair way to help pay for public services.

I am open to HST increases or more radical suggestions like a carbon tax provided they are combined with tax credits, themselves essentially a tweaking of the personal income tax, to offset the potential harm done to poor families.

What I am not open to is decision makers running in the other direction at the mere sound of the word tax. No good can come from refusing to talk about how to pay the bills.