When the NDP warned during last year’s election that Brad Wall had a secret agenda, they wouldn’t have guessed that he wanted to out-flank them with policies more redistributionist than their own. And yet, that is exactly what the government’s approach to tax cuts has done. By raising the basic and child exemptions, the new tax policy chooses immediate windfalls and to shift responsibility for funding government services up the income scale. It contrasts with the direction of other provinces, other countries, and even the previous government.
Tax cuts can be measured in two ways and the new tax policy is designed for only one of them.
So far as giving immediate benefits to as many people as possible, the new tax policy could not have done better. It has reduced taxes for every single earner and is even retroactive for this year. The cut feels biggest for low income earners because they get the same reduction off a smaller original tax bill. Higher income earners see a reduction even though the tax system has intensified its focus on them –the provincial government is now funded by a smaller group of taxpayers.
The second aspect of tax policy, what the new tax measures will encourage in the long-term, could scarcely have done worse. For all but a small minority, it does nothing to change the return on choosing to earn an extra dollar. It does nothing to promote choices towards earning more income through investing, working and acquiring more skills. For the eighty thousand who were paying the bottom rate but are now exempt from all tax, the tax on earning an extra dollar has just gone from eleven per cent to zero. A major marginal tax rate reduction for that group, but they represent only about one worker out of every eight.
Perhaps there is no ultimate answer to the growth-redistribution question, but the fact is that government has made a choice with its new policy. And as with all choices, it is worth considering what the alternatives were and what the good and bad consequences are likely to be.
An alternative would have been to reduce the actual tax rates. For a roughly similar reduction in total revenue, they could have reduced all of the tax rates by two per cent. This would not have had the same universal and immediate benefits, but would have improved the return on generating more wealth for the majority of Saskatchewan workers. Of course, that contrasting alternative reveals any number of possibilities that would be a mixture of itself, and the actual choice the government has made.
Judging the consequences is subjective, but one way to assess them is a comparison to what has happened in the past, what is happening elsewhere, and what the government’s stated goals are.
The previous administration vastly simplified the income tax system but also significantly reduced rates, in line with what other provinces have done and are considering doing. With considerable political bravery, it slashed taxes like company, corporate, and capital taxes. Cutting these has little short term voter appeal but great long term economic benefit. It’s called leadership. Still, all of Saskatchewan’s three rates are higher than the single ten per cent rate that Alberta has, and that New Brunswick just released an official discussion paper on. Twenty-five countries around the world from Ireland to Iceland have adopted single rate taxes, which are now almost a consensus policy in former Soviet countries.
In all of these cases, the rationale for adopting simpler, flatter tax structures has been to attract investment, increase the rewards for economic activity, and reduce the rewards for tax avoidance. The results have been significant economic growth, greater government revenue and, perhaps surprisingly, reductions in income equality.
A single rate tax may be a leap too far for Saskatchewan, but its popularity and success elsewhere puts the new Saskatchewan policy into perspective. Jurisdictions have adopted single rate taxes for reasons that sound a lot like Saskatchewan government catch cries. They aimed to, and have, enhanced their various environments for sustained economic growth.
Saskatchewan has chosen instead to use the proceeds of a commodity driven boom for redistributionist tax policy. It’s a policy that certainly has benefits, but enhancing the economic environment for growth and a more diverse economy is not one of them. Lucky they’ve kept that two-billion dollar surplus.