New Brunswick’s tax strategy drains the economy

The Laffer curve shows us that taxing the rich too much simply drives down economic activity, and pushes the tax burden to mid- and low-income earners

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Sometimes governments increase tax rates but actually end up with less tax revenue. New Brunswick is a good example of this paradox.

The province’s income tax rates have been erratic over the last decade, particularly for the top tier of earners. The top rate of provincial income tax decreased from 17.95 per cent in 2008 to 14.30 per cent by 2010, and rose back to 17.84 per cent in 2014. In 2015, the government introduced two new tax brackets, 21.0 per cent for those earning $150,000 to $250,000 a year and 25.75 per cent for those earning more than $250,000 a year. That highest bracket was abandoned in 2016 and settled to a rate of 20.3 per cent for those earning more than $150,000.

The two new high-income brackets were intended to raise $30 million in additional revenue annually, according to then-finance minister Roger Melanson. However, a new report released by Statistics Canada suggests that the combined federal and provincial tax bill for the richest 600 New Brunswickers in 2015 was $5.8 million less than in 2014, despite the spike in tax rates.

Employing the Laffer curve, which illustrates the relationship between taxation and government revenue, suggests that New Brunswick has increased taxes to the point where revenue is diminishing and, consequently, the economy is harmed.

Economic activities that generate income are impeded when tax rates become too high. Think of it like summer warmth: up to a point, more people go outside to enjoy good weather. But if it gets too hot, people take refuge in cool places. So it is with taxation: when people and businesses are taxed too much, they either find ways to decrease their taxable income or leave for less-punitive tax climates. And that leaves tax collectors with lower revenues.

The theoretical model of the Laffer curve has played out in reality many times. Economist Daniel J. Mitchell points to recent examples of the curve in action when income tax rates were increased in Britain, France and South Africa.

On a graph, the Laffer curve looks like an inverted-U. Governments sometimes look for the revenue maximizing point, which is the peak of the curve. But New Brunswick seems to have raised tax rates past that point. This seems evident given the drop in tax revenue collected from the richest New Brunswickers in 2015, after tax rates jumped from under 18 to nearly 26 per cent.

Although New Brunswick cut income taxes again in 2016, the province’s tax rates remain high enough to damage the economy. A 2012 study shows that $20 worth of damage is inflicted on the private sector for every tax dollar collected when governments set rates to the peak of the curve.

New Brunswickers can’t be squeezed for any more funds. The number of full-time workers – those most likely to pay income tax – has essentially remained stagnant for a decade, hovering between 294,000 and 304,000. Demographic trends don’t point to any great future improvement, particularly if tax rates continue to discourage economic activity.

Governments can’t just focus on maximizing revenues by setting tax rates at the top of the Laffer curve. They must think of the health of the economy and that means they must stay on the lower portion of the curve.

Collecting more from New Brunswickers will only cause more damage and discourage investment, entrepreneurship and job creation.

Asking the top one per cent of earners to pay a little more is like turning up the heat in the summer. As the evidence from 2015 shows, the top one per cent will simply reduce their activity, find a cooler tax climate and pay less.

And as revenues decline from highest income earners, the tax burden will shift to mid- and low-income earners.

Patrick Webber is a research associate at the Atlantic Institute for Market Studies.


new brunswick, tax strategy, economy

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