Fair Taxes for Nova Scotians - What Would That Mean ?

1. Fair Taxes for Nova Scotians - What Would That Mean? Lars Osberg Economics Department, Dalhousie University

2. What do Taxes Do? • Taxes Raise Revenues – pay for services & transfers • Public Services influence Level of Output • E.g. roads, schools, police, health care • Public Services + Taxes & Transfers influence Distribution of Output • Fair Taxes to enable Fair Outcomes – Fair Level to imply sufficient revenue + Fair Structure to share burdens fairly • Taxes Change Private Incentives and influence behaviour Disincentives? – Do taxes reduce incentives for desirable behaviors? Correct Incentives? - Can taxes help Private Incentives align to Public Good? Some privately desirable behaviours cause harm to others - Taxes as compensation for harm & added incentive to avoid Fair Taxes – both process and outcome equity matter Fairness is a multi-dimensional idea

3. Fairness: Horizontal Equity – equal taxes for those with equal ability to pay • Horizontal Equity - “A Buck is a Buck” • Total Income taxed at same rate whether income comes from Wages or Salaries or Capital Gains or Dividends? • Consumption taxed at same rate regardless* of type of commodity? • * Note: if no harm caused to others by consumption • Horizontal Inequity • Income example: special tax treatment for capital gains? • Consumption example: How to keep warm in winter? • Insulate Home – Pay HST • Buy sweaters – Pay HST • Burn home heating oil – No HST

4. Fairness: Vertical Equity – greater taxes for those with greater ability to pay • Historical Context: • Top 1% has BIG increase in income share in Canada 1986-2011 • Tax rates at top have fallen in Canada • Nova Scotia – raised top bracket in 2009; now 2nd to Quebec (how long?) • Vertical Equity • Progressivity in Total Tax Burden – sum of all taxes • Vertical Inequity • Income Taxes: Income splitting gives most $ to top income • Consumption Taxes: • Bigger Income => Bigger House =>Bigger Fuel Bill => Bigger HST save

5. Long Swing in Top 1% Share

6. Strong Real Income Growth @ Very TopNil growth for middle class

7. Total tax incidence proportional over most of range – progressivity erodes since 2000Marc Lee, (2007) Eroding Tax Fairness: Tax Incidence in Canada, 1990 to 2005 Canadian Centre for Policy Alternatives, Toronto November 2007

8. Marc Lee, (2007) Eroding Tax Fairness: Tax Incidence in Canada, 1990 to 2005 Canadian Centre for Policy Alternatives, Toronto November 2007

9. Taxes as fair price for services used ? • Money paid to government has many names • Fees, Duties, Royalties, Taxes, Fines, Fares: all = $$$$ • Fair “Price” for government services – only if discretionary • Example: Parking Meters & Tickets; price for use of public streets • “Taxes”: Increase Incentive to use scarce public resources sensibly • BUT can conflict with Vertical Equity Principle • Example: HRM proposals for ‘reform’ of property tax system • Most $$ benefits to South End in short run • BUT in long run, transfer of municipal tax burden to poorer areas implies continual pressure for ever lower municipal service levels • Both rich and poor end up worse off !!!

10. Taxes & Intergenerational Fairness • Fairness and Equality of Opportunity • Canada & Nova Scotia – no Inheritance Tax + increased private tuition funding for post-secondary education • Children of the affluent inherit education + financial wealth • Children of poor get choice: student loan debt or less education • Fairness and the Intergenerational Bequest • Environmental Bequest: Global Warming • Burn Fossil Fuel? Carbon Tax discourages; HST exempt encourages • Capital Stock • Infrastructure Investment & Repair depends on level of tax revenue • Public Debt • Declining Debt/GDP ratio implies sustainable for future generations

11. Tax Incentives & Disincentives ? • Disincentive to Desirable Behaviours? • Labour Supply: “Optimal” Top Rate ~ 70% (well above current rate) • Fair Taxes to offset harms caused to others • Undeveloped vacant lots which cause downtown blight • Halifax: Developers do not now pay for harm caused to neighbours • Escalating tax on vacant properties & land could increases incentives to develop • Burning fossil fuels adds CO2, increases global warming The “Double Dividend” of Carbon taxes (everywhere) - increased incentives to reduce fossil fuel usage - produces revenue which enables other taxes to be cut Nova Scotia: The “Double Deficit” of Fuel Oil Tax Exemption - less incentive to reduce CO2 emissions - $88 Million less revenue for services &/or lower taxes

12. Taxes & Public Services: Two sides of one coin • “Tooth Fairy Economics” • Cuts in taxation are free – no cost to level of Public Services • Real World Economics • Efficiency: Jurisdictions differ in level of taxes/public service • Davos “Competitiveness Index” – Top countries are NOT low tax • Equity: “Social Wage” of public services • Large & most important for the less affluent • Well-Being: Public Goods are also valued by the Affluent • Parks, Safe Streets, Public Amenities have positive Income elasticity • Progressive taxes can make both rich & poor better off !!