Laffer and Laughter

A couple of interesting stories this morning.  First, an NDP government in Nova Scotia brings in a fiscally conservative budget with a massive tax hike in order to clean up the books.  Just to put things in perspective the 2 percentage point increase in the HST is projected to add $231 million to the revenue side (after rebates for low income earners).  The $222 million deficit projected by NS is less than 1/3 New Brunswick’s budget deficit.

Translation?  Get ready for the next NB budget to look a lot like Dexters.  Expect an increase in the HST – it was recommended in New Brunswick as an offset to the tax cuts but never implemented.  It will likely be now (no matter who is in power after the election).

It is important to point out that Nova Scotia’s overall debt situation is worse than New Brunswick so they have a more urgent need to get their deficit eliminated but I have said that New Brunswick should have upped the HST in its last budget.

As for the Laffer part of this blog – I see that Dexter is using tax incentives to stimulate investment rather than just straight tax cuts for business (although there is a token cut for small businesses).  As I have said many times before, I think corporate tax rates should be competitive but after than any tax cuts should be tied to good behaviour (i.e. investment tax credits).  If you expand in New Brunswick, get more productive, develop new foreign markets, you get tax incentives – otherwise – not.  My viewpoint on this is not widely shared it would seem. 

By the way, that is not directly related to the Laffer curve but you will allow me some flexibility here.  Laffer postulated that as you raise tax rates you increase taxes collected but only to a point.  At some point the more you raise tax rates, the amount of tax collected actually goes down.  I don’t necessarily agree with Laffer (except on a theoretical basis) but my thesis – a kind of Lafferian idea – is that if you cut tax rates you don’t necessarily get new investment and economic growth (as is postulated by some).  If your goal is new investment, you should tie tax cuts directly to new investment.

As for the laughter part of this blog, I refer you to my column today.

5 thoughts on “Laffer and Laughter

  1. And as any blogger knows, its easier to criticize than compose. An excellent article with extremely pertinent points-and you HAD to turn it into a slight on the NBPower deal. If you and other supporters of the deal are feeling let down, thats YOUR problem, those against it certainly aren’t, and certainly don’t feel that its ‘not the success they envisioned’. Far from it, if you want to see ‘political joy’ then the facebook group was the place to go, some people even held parties.
    Perhaps you are feeling ‘let down’ because the ‘yes’ side really failed to push the government to answer the pertinent questions, held NO rallies, and really didn’t offer any other vision than “Quebec owns the utility-we don’t really need any other policies”.
    If you defend the status quo, that ‘politics as usual’ ideal where people who agree with a particular proposal simply want it rammed down the public’s throat whether they like it or not, then I don’t doubt the ‘spring in the step’ is gone. For protestors, the outlook is quite the opposite, rightly or wrongly many believe this deal was killed by protest, something that is VERY unusual in the world today, and something south americans are regularly KILLED for attempting.
    In short, people are feeling empowered and organized. It’s true that right now people simply don’t know where to go with it, the political machinery in NB has been bought for so long there are simply no real political alternatives right now. However, there are several people talking about running as independants, and several tories have woken up to the fact that they are simply going to have to pay attention to the public.
    So I don’t think I’ve EVER seen more optimism. Economically, you are right, nobody really trusts Irving or the government to be able, or willing, to solve their problems for them. But you need to vary your friends some if you want to experience some of that optimism, because its a LOT more real than when McKenna was around with the largest PR staff on the continent. If you look at newspapers of the day, NBers certainly weren’t that enamoured of him, every election his vote plummeted, its a good thing he was only around ten years.
    Get into the political game dude, there is TONS of optimism there. You can probably even siphon some of that onto economic issues.

  2. “Get ready for the next NB budget to look a lot like Dexters.”

    I agree with that prediction. Interesting that it takes an NDP govt to lead the way to a sensible balancing of taxes and programs. There are several examples of NDP govts across the country taking a fiscally responsible approach to program management. Wish it was more common.

    Along with a hike in the HST here in NB, I expect we will also see the shelving of the proposed corporate tax cuts now planned for the next few years. They can’t be either justified or afforded.

  3. I wouldn’t be so sure about corporate income taxes, they couldn’t be afforded and certainly not justified in the first place, but the old ‘if they pay less then more investment will come here’ line was trotted out even though the liberals couldn’t manage to balance the budget. They also lowered the gas tax, another consumptive tax that was insane. They started talking about consumptive taxes again, its better than raising income taxes on the wealthy-but after raising the gas tax they don’t seem to be able to deal with the schizophrenia. The NDP IS usually more responsible, they are usually the only ones honest enough to raise taxes and SAY they are raising taxes, rather than calling it a ‘health premium’ and cutting more services.

    There is no way of knowing what they might do in NB, mineral royalties saved the budget from being really bad, that might continue, it might not. Since both the first liberal tax increase and the later tax cut were disproportionate to the wealthy, the tories will have to try to make tax increases a ‘class issue’ because essentially their ‘tax cuts’ theme has been stolen by the liberals. Of course with the NBPower deal they may not have to do ANYTHING and still get elected and the government will simply continue along as if it hadn’t changed hands at all.

  4. While we are at it, let’s not forget about highway tolls. Between a 2% sales tax increase and re-instating the tolls, the latter might be the easier sell. Either way, there is no denying that government needs options to generate more revenue, maybe both options are required. Keep in mind that should the federal government decide to ramp back up the federal portion of the HST, it would be near impossible to increase the provincial portion. I would rather keep the 2% in province than hope some fraction of it trickles back through federal programs.

  5. Like the post, love the column. Thinking optimistically about this stuff will lead to more and better ideas coming out.

    Thanks for the reminder from worn down NBer

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