October 11, 2021

Big Reset Tax Measures Little More than Window Dressing

By Toby Sanger, Executive Director Canadians for Tax Fairness

The Big Reset report, to its credit, identifies a number of additional taxes and other revenue measures that would substantially increase revenues and funding for the province of Newfoundland and Labrador–and some of them are progressive as well.  These include modest increases to tax rates for personal income, corporate income, the HST, sales taxes, gasoline, payroll, and tobacco. It also calls for a broadening of property taxes and for the government to consider introducing wealth taxes, inheritance taxes, gift taxes and luxury taxes.

However, the positive recommendations that it makes are overwhelmed both by the sheer magnitude of its negative recommendations–especially the deep cuts to public services–and by the many revenue options that are completely ignored.

The PERT proposals rely much more heavily on spending cuts than on tax and revenue increases to “reset” the books. Within five years, the total value of the spending cuts proposed amount to $895 million a year, 2.4 times as much as the total annual value of the new taxes and revenues being proposed for that year.

This is reminiscent of cuts imposed by Paul Martin in the 1990s when he slayed the federal deficit on the backs of public services and cuts to the provinces.  Martin later used the money saved from these spending cuts primarily to cut taxes on corporations and the wealthy. The kicker is we’re still suffering the consequences of Martin’s actions decades later through extreme inequalities.

That’s a massive concern with this “Big Reset” exercise as well: that the government of Newfoundland and Labrador is generating massive alarmism about the deficit and debt to push through deep cuts to public services and wages, which are then followed by tax cuts for wealthy residents that will further exacerbate inequities – inequities that actually hamper economic growth..

The Big Reset/PERT report even acknowledges  that it will cause a lot of economic damage.  Instead of growing with the economy, their forecast of annual tax revenues shows them declining by 20% over the next five years! (p. 186).

This is because they expect the economy to shrink as a result of the deep spending cuts, not grow.

The economic multipliers associated with taxes, especially corporate taxes and taxes on high incomes, are much lower than the economic multipliers for public spending.  This means that cuts to public spending cause much more job loss and more economic damage than these types of tax increases.   (Multiplier chart)

So what should the government of Newfoundland and Labrador do to deal with large deficits and growing debts?

First, as Jim Stanford has emphasized, in the current low interest environment, some level of ongoing deficits (and slightly growing debts) aren’t a problem as long as the economy also continues to grow at a higher rate than the interest costs on paying the debt.  This is why it is so important to avoid  enacting spending cuts that will shrink the economy and reduce revenues. Shrinking the economy is the worst thing to do.

Second, there are many ways the government can increase its revenues in a progressive and positive way that increases tax fairness and has little negative impact on the economy.

Instead of increasing tax rates for everyone in all tax brackets, the government should focus on increasing rates for higher incomes.

For example, instead of increasing tax rates for everyone as the PERT report recommends–the province should improve its progressivity by more significantly reducing thresholds and raising rates for higher incomes. it’s true that  the government finally committed to increase rates for the very top incomes in their last budget, but they barely touched rates for those making from $100,000 to $200,000.  And because the tax thresholds kick in at much higher income levels, those with incomes from $100,000 to $500,000 would still pay lower overall levels of tax than their counterparts in most other Atlantic and eastern provinces.  (NL 2021 Budget Speech, p 7).

Next, instead of exempting small but high earning small businesses from the corporate tax rate, the province should only allow business that that have at least two employees to make use of the small business tax rate. Quebec has had some success with this move. This will reduce the use of small businesses corporations by high income professionals to avoid higher personal income tax rates, which is widely done.

The province should also restore capital taxes to apply to all large corporations and not just financial institutions.

The PERT’s silence on closing regressive tax loopholes is a major omission.  There isn’t much point in raising rates on higher incomes if high income earners can avoid taxes by using different loopholes and tax breaks.

For instance, just eliminating the stock option and capital gains deductions would recover about as much revenue–$15 million a year–as the provincial government estimates it will gain from increasing top income tax rates as outlined in the budget.  Unfortunately, in the middle of what it claims is a fiscal crisis, the provincial government also created new and unnecessary tax breaks for investors and also an unnecessary physical activity tax credit. These will do little to really increase investment or physical activity, as experience with the federal fitness tax credit showed. Instead, they’ll provide more tax breaks for investors and give wealthy individuals a tax break on their golf and country club memberships or for horseback riding lessons.

Providing millions in these tax breaks is absolutely unfair and inappropriate when the government is considering such drastic cuts to basic public services. Higher income individuals in the province can afford to pay considerably more, given how much they’ve benefited from economic growth and tax changes in recent years.

The PERT’s tax recommendations are little more than window dressing, designed to make it look like all avenues for a Reset have been considered when in fact the choices made will reinforce income and wealth inequality and create the crisis the government is hoping to avoid.