Should we tax the rich to help reduce the deficit?

Tax policy in New Brunswick is always interesting.   Because the New Brunswick economy is weaker than most, we have to carve off a greater share of our GDP to pay for public services.  These day’s provincial government spending is roughly equivalent to 24% of provincial GDP.  That is higher than all other provinces except PEI.

But what’s a poor government to do?  The feds are squeezing transfers.  The economy isn’t growing.  The masses are fighting against natural gas development which might bring in some of those royalty revenues that engorge the AB, SK and NL governments.

So we come to tax increases realizing that we already tax the economy more than all other provinces except PEI.

So where is the low hanging fruit?  The Libs are proposing an increased income tax rate for those folks earning $150k and up.  They expect it to bring in a modest $28.7 million in new revenue (or about $4,400 per Richie Rich).

Is this a good idea?  Sorry to say I won’t answer that question directly as I’m not sure myself but there are a few points for consideration.

First, there are only about 6,600 NBers that earn more than $150,000 per year.  That is only 1.1% of income earners in the province.  And the Liberal realize that many of these earners are what I would call a ‘captive’ audience.  They include senior public servants, doctors, lawyers and others that really can’t pick up and move – or if they did they would face a similar high tax rate in NS, PE, QC or if they moved to BC, AB or ON they would face the tax-housing cost arbitrage problem.   I guess they could move to Newfoundland and Labrador which still has relatively reasonable housing costs and a low top tax rate.

I’m a little more nervous about the non-captive market – senior managers in the big firms, etc.  It will make it harder for firms to recruit in leadership earning over $150k but hopefully they will also milk the tax-housing cost arbitrage issue.

The other segment of the $150k+ folks (a.k.a. the ‘rich’) tend to be successful entrepreneurs.  That is a group that all governments tend to romanticize and they will  not be happy with this tax increase.  I have no way of knowing how many there are but it is likely a couple of thousand people.  Business owners have ways of sheltering income but ultimately if they take it out as income they will face the higher  rate.

I have discussed this issue for some time with economists and other policy analysts.  When Victor Boudreau cut the top tax rate back in his time (seems like a long time ago, doesn’t  it?) I made the same argument that it would most benefit those in the ‘captive’ market but my colleagues were more concerned with the entrepreneurs and highly mobile professional workforce.  Some of them saw it as a long term drag on the knowledge economy.

But it does comes back to the issue of choices. As stated above, NBers earning middle and upper income face among the highest tax rates in the country but people still expect a certain quality of public services and infrastructure.

What would you do?  As I have written about before, New Brunswick already spends less than SK, MB, PE and NL per capita on public services and similar to AB, NS and BC.  Because of our lack of urban scale and rapidly aging population it is hard to see that there is significant room for dramatic spending cuts without impacting services.  If you introduce more “user pay” it becomes a tax by another name.

Folks like me argue for an aggressive pro-growth agenda but that is a longer term proposition.  In the short term governments do have to grapple with the cost side and the tax side.  We did get a boost from the Feds this year but I’m not sure if that will be replicated in the coming years (particularly with all the griping out of Ontario).