Dispatches from the road: On Taxes

All frigged up out here in SF. That whole time differential is a bit tricky. My watch tells me it’s 7:45 pm but my head tells me 11:45 pm.

But other than that, I highly recommend SF to anyone. It’s not Minto but it oozes cool and hip. Also there’s a lot to learn here if we are to create real urban spaces in New Brunswick about green spaces, minimizing traffic, urban living, etc.

But I digress.

I wanted to serve up a bit of a ‘primer’ on taxes. My reaction to the Libs first budget was that it was very incremental and didn’t do much of anything. I am hoping that real changes will come when the SSTF(TM) gets done its work.

But the reaction from other interest groups has been pretty severe. The CFIB is sure that thousands of businesses will collapse under the weight of a 3.5% increase in their small biz tax rate of now – gasp – 5%. The Canadian Manufacturers & Exporters association said “tax increases send the wrong message to investors”. And our old friends at the Atlantic Institute for Market Studies said taxes “make the province a less attractive place to do business”.

Now here’s the rub. The paradox. The catch 22. The $64k question.

Cliches aside.

The Libs are defining ‘self-sufficiency’ as no more Equalization. That’s $1.5B per year folks. That’s $4,285.71 – give or take a few pennies – per taxpayer in New Brunswick.

Now, where’s that dough gonna come from?

Certainly not the piddly tax increases in the budget – which amount to almost as much tax gained as lost from the cut in gas tax (more or less).

AIMS, CIFB, Chamber of Commerce, Manufacturers association, et. al. aside, businesses don’t pay corporate tax in New Brunswick. Only 4% of the total provincial budget comes from corporate taxes. Bell Canada pays more corporate tax (fed/prov) in a year than all New Brunswick businesses combined (yes, including the Irvings). I don’t know why. I have said before I am not a tax expert but when Microsoft set up its European headquarters in Ireland, it bragged that over a 5 year period it paid $1.5 billion in corporate taxes – one company. All New Brunswick companies combined pay $239 million in provincial corporate tax. Now that compares to about 8% of the total provincial budget in Ontario and 10% in California.

So, it’s a bit of a stretch to say that corporate taxation is at the heart of our inability to grow our economy. No, sorry AIMS, it’s a bit deeper than that, I am sorry to say.

But back to that tax thing.

As the chart below shows, we have to eliminate the #1 source of provincial government revenue (Equalization) in 20 years to meet the Premiers SS goal. Obviously, we are going to have to massively crank up personal income taxes paid because that’s the biggest ‘own source’ tax revenue source. And you do that by either raising taxes, raising incomes or raising the pool of wage earners (faster than the costs they add to the system). And that’s hard. Raising taxes is tough (these piddly increases do literally nothing on the revenue side). You would have have to more than double personal taxes and of course you would kill your HST revenue not to mention drive 400k people out of the province (except government workers).

Raising incomes is an option but you can’t legislate that. You can encourage that.

So that leaves raising the pool of wage earners. Creating good paying jobs and attracting people to work those jobs (again the incremental taxes paid have to be higher than the social costs they take out – health, education, etc.). The SSTF says we have to create 100k new jobs – I look at these numbers and I can’t see it. $1.4B over 100k jobs is $14,000 in provincial taxes paid per job. That means the average salary of those jobs would have to be at least $90k per year. And, that, my friends is tough. Especially considering for ever 10 high paying jobs you create, you need another 3 in low wage service jobs. So if there are 70,000 high paying jobs and 30,000 low paying jobs – the high paying jobs would have to be in the $120k range per year. Now, the SSTF says that all existing businesses need to raise their wages by 20%. That would change my calculation considerably – but I am making the point. The enormity of this is even greater than the SSTF(TM) would say.

So, back to my mantra. We need to attract global investment. Presumably global investment that pays taxes (like companies in Ontario and California). If we could get corporate tax up to 8% of the budget, that would be a huge leap forward. Also this investment needs to translate into high paying jobs to boost personal income taxes paid.