The provincial government is considering various tax measures in its efforts to balance the books. The 10% income tax cut may be rescinded. But there is also speculation of a health surtax. How fair would these tax changes be? The recent increases in user fees do not bode well as an indication of the approach that will be taken.
Any new tax needs to reflect the principles of progressive taxation if it is to be fair and to correct the social costs of the 10% income tax cut.
A progressive tax is based on ability or capacity to pay. A person making $100,000 per year would pay a greater portion of their income in taxes than a person making $25,000. In practise we all pay the same rate of provincial tax on income up to $30,000.Income above this level is taxed at higher rate Reducing a progressive tax - such as the 10% income tax cut implemented in January - reduces the fairness of the tax system. Upper income earners are the big winners. Moreover, more than 200,000 very low income tax filers do not pay any income tax and hence receive no benefit from the income tax cut, but they will have to pay the increases in user fees.
Taxation finances government services, programs and infrastructure. Progressive taxes contribute to a redistribution of income from the highest income to people most in need.
A regressive tax structure, on the other hand, puts a greater burden on low income citizens. For example, a person earning $10,000 pays the same ambulance fee as someone receiving $100,000.
There is an argument for user fees when we want to discourage use, as in the case of alcohol or cigarettes, but they should not be a tax grab which will limit access to necessary services, such as ambulances. An extensive reliance on user fees and on sales and property taxes reduces the already limited fairness of our tax system.
Not all upper income taxpayers are happy about the fairness in our tax system. They have had some success in pushing back the progressivity of our tax system through income tax cuts.
Pressure to remove the progressive nature of our tax system continues. A recent TD Bank report promotes shifting the tax base to consumption as a form of "tax" reform. It advocates "a greater reliance on user fees. Proceeds from these levies could be earmarked to reducing income taxes, leaving the overall tax burden unchanged."
Under the bank's scheme, the overall taxes collected may be unchanged but who bears the burden certainly changes. Such measures shift the taxation from income groups for whom taxation may be an inconvenience to lower income groups for whom it truly does become a burden. Almost half of Nova Scotians must spend their entire income just to survive. Thus most of their after-tax income is subject to sales tax. As a result a higher portion of their income goes to taxes in contrast to upper income earners who are able to save and invest a portion of their income, or travel outside of the province and avoid full taxation.
So what of the provincial government's musings on taxation?
A health surtax could be progressive if it were to focus on upper income taxpayers. However there are indications the federal government is studying a surtax along the lines of a "poll" tax. Such fixed taxes are highly regressive in that they charge each citizen the same amount regardless of income. The Hamm government should rule out any such measure.
Another surtax being touted is one that taxes only those earning above a set income, say $25,000. This would protect low income earners. However if it includes a maximum tax amount, such as a $750 cap, it would protect upper income earners, the same people who benefit the most from the income tax cut. This is another step in the wrong direction - in the end middle income taxpayers would bear the heaviest burden
The finance minister needs to generate additional revenue but he must do it in a socially responsible manner. In the interests of both social and fiscal responsibly the best decision is to rescind the 10% income tax cut. This would raise the needed revenue and do it fairly.
John Jacobs is the Director of the Canadian Centre for Policy Alternatives in Nova Scotia (CCPA-NS).