Presentation to the Select Committee on Tax Review by absences

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									Presentation to the Select Committee on Tax Review



                        by

          Bonny Pond & Auguste Gallant




                                              July 7, 2008
                                         Delta Beausejour
                                            Moncton, N.B.
A. INTRODUCTION
I would like to thank the Select Committee for giving us the opportunity to provide some input to
their deliberations as these take place over the summer.

Auguste and I decided two weeks ago to respond to this Discussion Paper. It is the first time we
have bothered to take part in such an endeavour and our expectations are – to say the least –
modest.

But, for what it is worth, we wanted this Select Committee to know that there are New
Brunswickers out there who do not ascribe to the “beggar thy neighbour” philosophy of economic
development; who believe that consultation means more than responding to pre-set ideological
positions; and who have the wits to know who will be better off and who will get it in the neck if
these so-called “options” are actually implemented.

There is so much covered in this short Discussion Paper that it would be impossible to respond to
all of it in the half hour that is accorded us. So, we will concentrate on two aspects of the paper:
first, the rationale for the cut in corporate taxes and second, the proposal for a flat tax.

What we decided we would not be able to cover – and hope that others will – are:

The carbon tax – which has nothing to do with the environment and everything to do with raising
$100 million in additional revenue that this government will need to remain “fiscally neutral” after
the cut in corporate taxes comes into effect. And I say this – not because I am against a carbon
tax per se – but because any serious proposal for a carbon tax would have included an analysis
and a plan – both of which are notably absent from this proposal. First, there would be an
analysis of how and to what extent this new carbon tax would actually reduce carbon emissions in
the province. No mention of that here. Secondly, there would be a plan for using this additional
revenue to invest in those projects/ideas that would enable New Brunswickers, as individuals,
and the communities within which they live, to actually reduce their emissions. Again, there is no
mention of anything of that nature here. If those in power do not know that people are already
cutting back and changing their habits to the extent that they can –living as we do in a province
with minimal public transport and already owning homes and cars they may not be the most
efficient but are what we have and cannot easily change – if they do not know this, then they
have not talked to New Brunswickers lately.

Property taxes – like everyone else in the province we have seen our property tax bill increase
roughly ten times the rate of inflation over the past few years. I notice that in this Discussion
Paper no note has been made of this continuing tax increase, only that it now provides almost
12% of all taxes raised in New Brunswick. On page 33 of the Discussion Paper it states:

           “… there are a number of property tax issues that should be considered to ensure that
           the overall tax system encourages income generation, job creation, sustainable growth
           and moves the province to self-sufficiency”

I am sure I do not have to remind the members of this Select Committee that both the Real
Property Tax Act and the Municipalities Act state that property taxes are to be used – and I quote
- “for the provision of services” - end quote – for the municipality or local service district. It is not
for “job growth” or for this government to try to offset cuts in corporate taxes.

Now, I will turn to the two aspects of this Discussion Paper that are of particular concern.
Auguste will wrap up the presentation with some ideas which the Select Committee might want to
consider as we believe these could truly help New Brunswick move towards self-sufficiency.




                                                                                                        2
B. THE RATIONALE FOR THE CUT IN CORPORATE TAXES
I must say this Discussion Paper is really quite disingenuous in how is uses words. Words –
especially those that are repeated often in any report –set the tone for the discussion that follows.
Something of a trick picked up from Goebbels, I believe.

Let’s look at how they use, over and over, words such as “re-balancing New Brunswick’s tax
system”. Phrases such as “balanced tax system” or “re-balancing the tax system” are used no
less than 19 times in this short document. There is no doubt they want us to remember this
phrase. And this is a phrase that, used over and over, give the reader the impression that
somehow our tax system has gotten out of balance. That, presumably, is not a good thing; so
this “imbalance” must be addressed.

Now it has been a few years since I cracked the economic textbooks. And after reading the
Discussion Paper I wondered if some of this “voodoo economics” had actually made its way into
the mainstream of economic theory. So, off I went to the university and checked out some of the
texts currently being used in courses on economics. Guess what? No such thing as a “balance”
in taxes. I looked in both text books and reference books. One reference book, the Oxford
Dictionary of Economics, boasts that it provides definitions for over 2,500 economic terms.
Guess what? No such thing as “balancing” taxation or “re-balancing” taxation. This is not
economic theory. Where the taxes are drawn from – who pays – is purely a political decision.

And this government has decided – check their “guiding principles” – that it will not be upper
income New Brunswickers who will pay. Corporations and “high-income” wage-earners will get
tax breaks meaning that it is those who do not make “high-incomes” who will be left holding the
bag. Their justification is that this will increase job creation and help move New Brunswick to a
position of self-sufficiency.

And the example they cite – over and over again – is the Republic of Ireland.

So, let’s look at Ireland. Ireland as an example the province should emulate was mentioned no
less than 9 times in the document. And always – without exception – in the context of its tax
policies:

                There have been major economic benefits from major tax reform in other
                jurisdictions, for example the Republic of Ireland. [page 4]

                This forum [on the role of taxes in transforming the economy] also examined the
                experience of the Republic of Ireland where general tax reductions similar to
                those being proposed in this discussion paper made a significant contribution to
                transforming the Irish economy into one of the strongest in the European Union.
                [page 7]

                Ireland, for example, cut its business taxes from the highest in the European
                Union to one of the lowest, and reaped new investment, growth, jobs and
                additional revenue as a result. [page 26]


And the growth in the Irish economy over the past few years has been impressive.

However, it is bad economics (if not actually dishonest) to mention the Irish miracle in the context
of only their tax reductions.

The Irish “miracle” has been widely studied. And a number of theories of the success they have
had in Ireland have been put forward.



                                                                                                    3
For example, this “miracle” or “boom” only happened after they entered the European Union.
Some have argued that it was the EU subsidies that generated the Irish miracle. Dr. Petr Mach,
Executive Director of Prague's Centre for Economics and Politics maintains that, instead of
forcing their own taxpayers to finance roads, etc., Ireland used German taxpayers' money
instead. This allowed the country to reduce taxes, particularly on corporate profits, which
attracted huge investment. One estimate that I saw put the value of the European Union
subsidies at 6% of GDP in the late 1970s and 1980s.

Former Irish Prime Minister, Garret Fitzgerald, agrees that entering the European Union was key
to their success but sees the advantage as being in the opening of markets:

                   "If we hadn't got into the European Union and got access to its markets, very little
                   of what's happened would have happened. But the reason we were successful
                   was that having got in we had the right policies to enable us to do well, so it's the
                   conjunction of the two that gives you the success. Outside the EU we were a
                   small country of four million people with no chance of going anywhere. So the
                   union has given us an opportunity, but we've cashed in on it by taking the right
                   decisions at certain key moments.”

So what were their “right policies”? Notice that Fitzgerald used the plural, so presumably he
believes it was more than simply cutting taxes.

Well, for one thing, they built a consensus around the direction the government should take. This
was not a one-day, you have a 20 minutes to react to what we are proposing, consultation.

A National Economic and Social Council (the NESC) was set up in 1973 (more than twenty years
before any so-called “miracle” happened). And it is still a key player today. The NESC is an
independent economic advisory body on which employers, workers, farming organizations, non-
governmental organizations, government departments and independent experts are represented.

In October of 1986 the NESC came forward with its strategy to get Ireland out of its dire economic
situation. Shortly thereafter a new prime minister took office and a three-year Program for
National Recovery (PNR) was implemented.

This was followed up by six other social partnership programs, from the 1991-1994 Program for
Economic and Social Progress to the Sustaining Progress Program.

Each one of these plans was jointly negotiated by the government, trade unions and the employer
organizations, collectively known as the social partners.

So -- tax reductions, entry into the EU, consensus-building … what other policies did they have?

Pierre Fortin, Professor of Economics at the Université du Québec à Montréal and who was
named by the Quebec Association of Business Economists as "the most influential Quebec
economist of the last decade" researched the Irish economic success for Industry Canada in
20001. His work centered on what he referred to as “Ireland’s long-term productivity boom” and
he first noted that:

                   “An important first influence to note behind this steady increase in productivity
                   has been the continued shift of economic activity from the primary sector to the
                   secondary and tertiary sectors. The Irish primary sector was still employing 40%
                   of Irish workers in 1960; this percentage is down to 9% today. It goes without
                   saying that such a development could not be replicated by Canada, where the

1
    “The Irish Economic Boom: Facts, Causes and Lessons” by Pierre Fortin, December 2000.


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                 transition from the primary sector had been largely completed by the end of the
                 1950s.” [page 6]

He then goes on to summarize the four main components of the Irish economic growth in the
1990s: (1) commercial policy; (2) industrial policy; (3) tax policy; and (4) education policy.

Regarding the commercial policy, Dr. Fortin notes that Ireland “understood early that the only way
for its small and very open economy to expand and prosper was to get a wide access to external
markets and to make its domestic economy competitive by exposing it to import competition”.
The commercial policy resulted in Ireland joining the European Union in 1973.

The industrial policy was what he calls a “welcoming attitude toward foreign investment” which
included greater administrative efficiency, a generous system of grants, tax incentives, etc.

The tax policy, on the other hand, he notes was not new. It dated back to the 1950s when there
was an introduction of a preferential rate of corporate taxation on profits from exports and
manufacturing activity. This preferential rate was replaced by a 10% corporate tax in the 1980s.
[Dr. Fortin’s paper was published in 2000; this corporate tax has since been increased to 12.5%.]

Finally, the education policy has been to encourage free secondary and post-secondary
education2. Again this is not a new policy. It dates back to the 1960s. I hardly need to remind
you that tuition fees in New Brunswick, based on Statistics Canada’s latest figures which are for
the 2003/2004 school year, are higher than the Canadian average in all eight disciplines for which
degrees are granted in this province – with one exception. Law. One might wonder who is
influential in government circles.

Before leaving the subject of the use of the Republic of Ireland as an example, there is one very
important caveat that Dr. Fortin included with regards to the tax policy in Ireland – and I quote:

                 “The support to foreign direct investment from tax policy is real and important, but
                 it has been there since the 1950s. By itself, it cannot explain the timing of the
                 recent foreign investment boom.”[page 8]

I have looked in some detail at the Irish example because it clearly illustrates, I believe, the
incompleteness and – I would go further – the disingenuous nature of this Discussion Paper
before us today. Because by concentrating on only one of the “policies” at play in the Republic of
Ireland it gives a biased – if fact, a false – reading of what actually happened there.

And this is important. If we want to move forward as a province – something we all want – then
there has to be an honest, open examination of options. Including tax policy. What we don’t
need is the cherry-picking of examples in order to justify a particular lobby group. The elephant in
the room, so to speak.




2
 The Irish Exchequer pays tuition fees to the university on behalf of students registered for full-time
undergraduate degree programmes of minimum two years’ duration according to the website of the
University College Dublin.


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C. PROPOSAL FOR A FLAT TAX
I said it was disingenuous how this Discussion Paper uses words. Like “re-balance”. Well, there
is another instance of that in the discussion of personal income taxes.

The phrase “hard-earned” is used no less than 17 times in the Discussion Paper - plus twice
more in the press release provided by the government on-line!!! This gives the – once again –
false impression that those “hard-working” New Brunswickers are actually going to be able to
keep more of their “hard-earned” dollars. This is not so. It is stated very clearly on page 7 that
these proposals will be “fiscally neutral”. So, the government will take as much money as before
from “hard-working” New Brunswickers.

The difference is that this government proposes to increase the use of a “regressive tax” (a word
that is definitely NOT used in the paper but is a real economic term) – that regressive tax being
the HST – and decrease the use of a “progressive tax” – the income tax which by their own
calculations will be much more generous to high-income individuals and much less generous to
those at the low and middle-income levels.

Regressive taxes like the HST are those that proportionately hit the lower income levels hardest.
With progressive taxes people pay a higher percentage of their income as their income (or their
ability to pay) rises. Even Adam Smith, the darling of the libertarians who are pushing for a flat
tax, wrote in 1776 in his book, “An Inquiry into the Nature and Causes of the Wealth of Nations” –
and I quote:

                 "The subject of every State ought to contribute towards the support of the
                government, as nearly as possible, in proportion to their respective abilities; that
                is, in proportion to the revenue which they respectively enjoy under the
                protection of the State."

Now if one looks at both Tables 2 and 6 in this Discussion Paper it is clear that if you make
between $40,000 and $60,000 you will benefit the least from the changes proposed for the tax
system in New Brunswick. Because not only will you receive the least in terms of savings on your
income tax but – at that level of income it is unlikely that you are buying too much Microsoft stock
– you are probably saving very little because you need every one of those “hard-earned” dollars
to pay for your mortgage, your car payments, food, gas, sports for the kids, and so on. All of
which (except food) will cost you more because of the increase in the HST. Remember the goal
is to increase the government’s revenue from the HST by an additional $250 million. To put it
bluntly: you will receive less in savings on your income tax and give back a lot more in additional
HST payments.

Perhaps it would be useful to keep in mind where most New Brunswickers fall in terms of their
income levels. According to a study by Statistics Canada if one looks at those who are 15 years
of age or older, the median income for a New Brunswicker who worked full-time and year-round
in 2005 was $35,288. It actually dropped 3% from what it was in 1980 (using constant 2005
dollars). Of course, the latest Labour Force Survey (for June 2008) shows an unemployment rate
of 8.9% so there are a lot of New Brunswickers who don’t, in fact, work full-time or year-round so
would fall considerably below this figure.

It will be these “hard-working” New Brunswickers who would generally be referred to as the
“middle class” or “working class” who will be hit hardest.

Nevertheless, the government presumably expects us to accept this additional tax burden
because their Discussion Paper would have us believe two things:




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           1. that it is because of a non-competitive income tax that employers cannot attract
           “high-income” earners to the province; therefore, our “growth” is being
           stymied
           2. that a flat tax would “simplify” the taxation system; the implication being it
           would be more fair

Let’s examine the first assumption. It is composed of two parts. First, we have a higher income
tax for those with high-incomes. Secondly, it is because of this higher income tax that “high-
income” earners don’t want to come to this province.
                                                            3
New Brunswick has four levels of income tax brackets . The lowest rate – 10.12% – is applicable
on the first $34,836 of taxable income; this rises to 17.95% on any amount of taxable income over
$113,273.

Now, each province has slightly different levels at which the percentages change and I don’t want
to be accused of comparing apples and oranges but it is quite safe to say that New Brunswick
has the third highest tax rate of income tax within Canada for the lowest income level. It also, to
be fair, has the highest rate for the highest level, just marginally over that of Nova Scotia and
Manitoba. Alberta, of course, has a straight 10% tax. They also have oil – identified as
“investment income” – which provides almost 1/3 of provincial revenues collected in that province.

Now, one has to put this in context. How many individuals in our province currently have incomes
in the highest bracket? Those who will gain the most from a “flat tax”. Well, based on Statistics
Canada’s figures for 2006 there are less than 4,000 New Brunswicers whose total income is over
$150,000/year. In other words, those high-income earners represented less than 1% of New
Brunswickers with income in 2006.4

So, now that we know who will be the winners if these proposals go ahead, we should look at
whether or not there is any validity to their argument that lower income taxes on the rich will
actually entice them to move to New Brunswick (or will it only profit the 3,550 who are already
here).

The quick answer is: it won’t make any difference.

I base this statement on studies that have looked at how taxation policy affects decision-making
in general of high-income earners. I see that there is one study footnoted in the paper apparently
supporting their contention that income tax rates influence people’s decisions as to where they
want to locate. I say “apparently” because that study (which is not a study at all but simply “a
review of the evidence”) says that “workers and the companies that employ them are motivated to
locate in jurisdictions where tax rates are most favourable”. Now, this is somewhat unclear as to
which comes first, the chicken or the egg; the business decision on location or the workers’
decision on location. I would hope that this paper, which comes from Georgia State University in
the U.S.A., is actually more specific than what is referenced here because don’t workers follow
jobs as opposed to the other way around? Because it seems to me that it was the oil companies
in Fort McMurray that enticed Newfoundlanders – and many others from our area – to move

3
    The current provincial portion of the income tax for New Brunswick residents is
           10.12% on the first $34,836 of taxable income
           15.48% on the next $38,837
           16.8% on the next $43,600
           17.95% on the amount over $113,273.
4
  There were 3,550 individuals in New Brunswick whose total income in 2006 was over $150,000. There
were 573,010 individuals with income (representing approximately 95% of all New Brunswickers). 3,550
is 0.6% of the total. Statistics Canada, CANSIM, table 111-0008, “Individuals by total income level, by
province and territory”.


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there. The oil companies did not set up because there was a surplus of “hard-working”
Maritimers who had moved to Alberta for the 10% income tax and the 0% provincial HST.

In the two weeks I had to prepare for this “consultation” I was not able to find any studies – one
way or the other – that showed the influence of taxation on an individual’s decision as to where
they would actually locate. There are, of course, many studies that have been made of the
influence of taxes on a person’s decision to work longer and produce more. I will leave it to
others to provide the necessary explanations of the labour supply curve and what the marginal
tax rate is that maximizes tax revenue in any specific country. I will simply cut to the chase and –
based on American studies – quote the conclusion of one of these which would be familiar to
                                                                rd
those studying microeconomics (I found it in a textbook for a 3 year economics class).
Goolsbee in 2000 examined the effect of higher taxes on corporate executives and found that –
quote – “even this extremely high-income group has little long-run response to tax changes”5.

The Discussion Paper itself says “all other factors being equal, they tend to migrate to where the
tax climate is most advantageous”. “All other factors being equal …. they tend” – not exactly the
hard data one would expect when imposing a major tax change on a province. Because, as we
know, all things are not equal. It is not true from a provincial perspective. If it were, we’d be
swimming in oil and our government would be sending out $400 cheques to every man, woman
and child in the province.

But it is also not true that all things are equal on a more personal level. Do prospective
employees check the income tax rate in a province before deciding to move? Possibly, at least
some of them probably do. More so than they might check the GST or HST rate? I doubt it. If
you are going to check one you probably will check the other given that, looking at the figures in
Table 1 of the Discussion Paper, personal income taxes account for 39% of all taxes raised in the
province while consumption taxes (HST, gas tax and tobacco tax) account for 38%. [if there were
such a thing as “balance” in taxes, I don’t think one could get much more “balanced” that this]
What else do they look at?

I would expect young professionals or “high-income” earners to be looking, first of all, for a job
that not only pays comparable with other areas but provides the continuous education that is
essential in virtually all disciplines today and provides the opportunity to move ahead. But they
would also be looking at the community they and their families would be entering and would want:
         … a health care system that has sufficient doctors, nurses and pathologists to give
                  one confidence in the overall system
         … an infrastructure that does not require “boil water” orders on a regular basis in
         the summer
         … an educational system that encourages and supports students – at whatever
         stage of their learning – and in both official languages
         … social programs for those who need them, such as those families who have an
                  autistic child
         … a road system that doesn’t put their wheels out of alignment every spring
         … a community that supports and encourages the arts

And, of course, family and language have always played a strong role as well.

The bottom line is that there is no evidence that reducing income tax for “high-income” earners
while increasing the consumption tax they – and everyone else – will pay on everything from their
hydro bill to the local company that aligns their car wheels will influence any decisions on location
in the future.

The second thing that the Discussion Paper would have us believe is that a flat tax would
“simplify” the taxation system.

5
    “Microeconomics”, 4th edition, by Jeffrey Perloff, page 139.


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Love that word, “simplify”. Another word, often used in this paper, that makes it seem that it is
only logical to do this simplification – whatever it is. And if the Discussion Paper were actually
proposing to “simplify” the tax system, I might be encouraged to look at it seriously.

However, I can easily handle the idea that someone’s “net income” will fall into one of four
groupings. Even without QuickTax this is not rocket science. However, getting to that “net
income” is the fun part. What would simplify the taxation system is getting rid of all of those
deductions that never seem to apply to the middle or low-income wage-earner and that would
normally require a tax accountant or tax lawyer to complete. I am referring to (and these are just
a very few of these “special considerations”):
         Limited Partnership Losses of Other Years (Line 251)
         Non-Capital Losses of Other Years (Line 252)
         Security Options Deductions (Line 249)
         Tax shelters (fill in the T5003 slip)
         Statement of Trust Income (T3 slips)
         Allowable Business Investment Loss (Lines 217 and 228)
         et cetera, et cetera and et cetera.

These are what make the income tax system complicated. These need to be “simplified”. And the
Discussion Paper makes no mention of examining, let alone advocating the elimination of these
in order to simplify the tax system.

To give a very recent example – and this comes from the Globe and Mail of June 17 th of this year
– so I am not making it up. It is widely believed, among the non-initiated – that for calculations of
“income” a dollar is a dollar is a dollar (except for capital gains of course when a dollar is only 50
cents). Well, not if that dollar – in this case, a $5,000 initiation fee and the roughly $2,000 annual
membership fees at the Barrie Country Club – is provided to a corporate executive by his
company to play golf. If that corporate executive says he doesn’t like golf. And although he did
golf a couple of times and did use the dining facilities at the country club to entertain his guests,
the Tax Court of Canada has ruled that this “income” is not, in fact, income for taxation purposes.

That is but one example of the “complications” within the taxation system that need to be
“simplified”.

But this Discussion Paper is not looking in that direction. It is looking straight ahead at one
“simplification” and one alone. The flat tax.

I realize that the so-called “options” in the Discussion Paper were taken from the C.D. Howe
Institute, the Fraser Institute6 and the Canadian Taxpayers Federation – basically the source of
all your information if the footnotes are any indication. It is quite fair to include their ideas – as out
of step with Maritime culture as they may be.

It is not fair – it is, in fact, dishonest – to exclude any options that differ from those of this very
narrow band of brothers.

I will quote three papers – all by respectable organizations or economists – that beg to differ on
this question. Of course, the vast majority of economists follow the line Adam Smith set down
over two hundred and thirty years ago with regard to paying taxes “in proportion” to one’s income
but in two weeks there is a limit to how much I can read and absorb. There is also a limit – 20
minutes to be exact – to my time here today.



6
 Going to the Fraser Institute web-site and typing “flat tax” into their search engine results in 694 hits.
Obviously they – and their backers – are major proponents of the idea of a “flat tax”.


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So, first let’s turn to the United Kingdom. And their Treasury department (not known as a radical
organization).

Because the idea of a flat tax has been bandied about ever since Russia put it into effect in that
country, the number-crunchers at Treasury did some calculations. By their reckoning, almost 30
million people in the UK would be out of pocket under a “flat tax” regime which would raise as
much money as the current system (i.e. be fiscally neutral).

The advocates of the flat tax system in England say it would benefit low-income earners because,
as with the proposals in this Discussion Paper, there would be a large tax-free personal
allowance. The suggestion was a personal allowance deduction of £15,000 (roughly $30,000
CDN as opposed to the $12,000 proposed by this government) and a rate of tax of 22% (as
opposed to the 10% provincial flat rate proposed here). Even with this more, shall we say,
reasonable structure, even those proposing the flat tax in the UK admit that initially there would
be a £60 billion reduction in government revenue.

In 2005, in response to a question in the House of Lords, a briefing paper was tabled on the flat
tax idea. From the web-site of the Treasury7 here are some of the conclusions presented and
these are exact quotes:
      [page 16] Simplicity will only be achieved by removing allowances and tax credits – not
         by having a single rate (ref. OECD paper – Fundamental Reform of Personal Income
         Tax)
      [page 18] An IMF working paper on Russia states that “a key lesson [from Russia] must
         be that tax-cutting reforms of this kind should not be expected to pay for themselves by
         greater work effort and improved compliance”
      [page 19] In 1999 the Norwegian Flat Tax Commission found that the first year effects of
         flat tax reform will give by far the largest tax cuts to high income individuals
      [page 20] As the OECD has commented it’s the removal of allowances, deductions
         and reliefs which delivers the main simplification. Having one rate of income tax
         rather than three gives you all of the costs of reform but few of the benefits.
         (emphasis in the original).

And to those who would argue that the flat tax would benefit low and middle-income earners, the
briefing paper [pages 21 & 22] concludes that this would be true only if – and I quote:
            1. substantial money is spent on generous personal allowances and/or a low tax
                 rate – meaning revenues suffer; or
            2. heroic assumptions are made about economic gains which trickle down
                 through the economy

Let’s now turn to Canada. By the way, it is the old Canadian Alliance party that for years
championed the idea of a flat tax in Canada. They called it “Solution 17” back in the days when
Stockwell Day was heading the party.

It was not, to put it mildly, well-received. I will give you the findings of a couple of well-known
academics who looked at the Alliance’s idea of a flat tax at that time.

The first is Dr. Neil Brooks who teaches tax law at Osgood Hall at the University of Toronto. He
looked at the flat tax proposal of the Canadian Alliance Party back in 2000. And as with this
government’s proposal it, too, included an increase in the personal allowance deduction. The
Alliance Party set their allowance at $10,000 as opposed to the $12,000 proposed here. Of
course that was 8 years ago. On the other hand, they set the flat tax at 17% compared to the
17% – 26% – 29% three-rate progressive income tax that was then in place at the federal level.



7
    See http://www.hm-treasury.gov.uk./media/8/D/foi_flattax010805.pdf.


                                                                                                      10
Dr. Brooks did some calculations on the Canadian Alliance proposal and found that a Bay Street
broker earning $250,000/year would receive a $26,000 annual tax saving; a corporate executive
or a bank executive earning $1 million/year would save over $115,000 a year. Remember that
the median total income of an individual in New Brunswick who works full-time and year-round
was only $35,288 in 2005.

To put it another way Dr. Brooks cites another study that found that – and I quote - “Solution 17
rate changes will increase the share of the income tax paid by those earning between $20,000
and $30,000 by 16 per cent, but reduce the share paid by those earning over $250,000 by 17 per
cent.”

Dr. Brooks’ summary could not be more clear:

                “The Canadian Alliance’s single-rate income tax is regressive, incoherent,
                inefficient and inconsistent with widely shared Canadian values. It’s regressive
                because it would give the largest tax cuts and the biggest resulting increases in
                income to high-income Canadians. It’s incoherent because no known theory of
                taxation can justify a constant marginal rate. It’s inefficient because there is very
                little evidence that re-jigging tax rates will increase the rate of economic growth.
                And it’s inconsistent with widely shared Canadian values because it rejects the
                very idea of community, putting in its place a mean-spirited (and thoroughly
                discredited) political philosophy.”

If some of you are wondering why I would bother quoting from studies that looked at something
proposed by the Canadian Alliance – a party roundly rejected by Maritimers – it is simply because
this portion of the Discussion Paper appears to be no more than a re-hash of the Canadian
Alliance’s so-called “Solution 17” back in the late 1990s. Figures have been updated slightly –
taking into effect inflation, I assume – but in essence it appears to be the same.

That same year, 2000, another academic weighed in on the subject. Jonathan Kesselman,
professor of economics at the University of British Columbia and Director of the UBC Centre for
Research on Economic and Social Policy wrote a paper entitled “Flat Taxes, Dual Taxes, Smart
Taxes: Making the Best Choices” that was published by the prestigious Institute for Research on
Public Policy. In his paper the author concludes that moving to a single rate for personal income
tax would all but eliminate the tax system’s progressivity and that claims for major simplification
from the flat tax and dual tax plans do not hold up to close scrutiny.

I quote these two last studies for a number of reasons. First, they are Canadian studies.
Secondly, they come from economists in the academic world, not those who are paid for their
studies. But mainly, I quote them because it is important that New Brunswickers be aware that
what is proposed in this paper is far from being accepted economic theory in academic circles.
Any experiment using New Brunswick as a Petri dish could have severe and long-lasting
consequences for our province.

I can see some reacting to this critique by saying these “options” couldn’t possibly be that bad
because why would any government risk the wrath of New Brunswickers by proposing them.

Well, there is an old saw that you may have heard before. It goes like this: where do you hide a
dead body? Answer: in a morgue. Well this [Discussion Paper] is the morgue and my suspicion
is that once all the other bodies are cleared away (as the government “listens” and “reacts” to the
concerns of New Brunswickers) a couple of the real bodies – those that are hidden here – will
remain. What are those? I’m not sure; but I’d put my money – my “hard-earned” money – on a
reduction in corporate taxes and a corresponding rise in the HST in order to make up the
difference.




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Not wanting to appear totally negative, Auguste will conclude this presentation on a more upbeat
note. Because there are other ideas out there – options, if you like. Ones that New Brunswickers
can get behind. Ones that could truly move our province towards self-sufficiency.




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D. CONCLUSION

There are some lessons here I believe. One is that we can learn from others.

Let’s go back to the Republic of Ireland. As we know, there were more than corporate tax cuts
that fuelled their economic boom.

What else was there? Well, there is something that was never mentioned. Ireland has an
inheritance tax. Now, there’s an idea whose time is coming. It’s called the Capital Acquisition
Tax (or CAT) in Ireland. This tax is on both gifts and inheritances and is set at 20% over and
above the amount of the exemption that can vary according to the relationship between the donor
and recipient.

Of course, Ireland is not the only country with an inheritance tax, estate tax or death duties or
whatever terminology is used in a particular country. Germany, France, Italy, the UK, Belgium,
the Netherlands, etc. all have such a tax. Even the United States has one; in fact, many states in
the USA have their own inheritance – or estate – taxes in addition to the federal one.

But is we want to move away from just taxes and look at the more interesting issue of economic
development, then there are still lessons to be learned from Ireland.

One such lesson is that educational policy lies as much within the economic portfolio as it does
within the so-called “social policy envelop”. One cannot be viewed in isolation from the other.
Even the C.D. Howe Institute concluded in a 2005 study that increasing literacy by one level
would increase Canada’s productivity by 2.5% and the GDP by 1%.

And that was for Canada. New Brunswick’s literacy levels are considerably below those of the
Canadian average.

Some fast figures to illustrate. According to the scale used by the International Adult Literacy and
Skills Survey, a literacy level of level 3 or higher is needed to meet today’s demands. There are
what are called four “domains” of literacy (“prose”, “document”, “numeracy” and “problem-
solving”) and in all four domains New Brunswick is, as one study put it, “well entrenched in level
2” and has “significantly lower literacy skills in all four domains than the average”.

In fact in two of those domains, New Brunswick scores actually decreased from 1994 to 2003 8 at
levels above level 3. Furthermore, for the working age population (16 to 65) the average scores
for both “prose” and “document” are 10 points below the minimum score for level 3. For
“numeracy” the average score is within level 2 and for “problem solving” it is only six points above
a level 1.

To put that in context, let’s look at it this way. The reason why level 3 is called the “minimum
level to function” is that by their definition although one may be able to read a report like this
Discussion Paper one – quote – “can’t manage when challenged with something new”. So by
that definition 83% of New Brunswickers could not read and challenge the new proposals being
presented in the Discussion Paper here today.

And it is not just the high rate of illiteracy that is of concern. Those who are now in school are not
performing at a level comparable with students their own age in the other nine provinces.




8
  There was a decrease in the percentage of persons with level 4/5 in “prose” from 16% to 12% and a drop
from 15% to 12% in the percentage with level 4/5 in “document”.


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The 2006 report on the performance in science, reading and mathematics for Canadians aged 15
compared, not only Canadian students with those of other countries, but it was also able to
compare the scores between students in the 10 provinces. As we probably all know, New
Brunswick students scored below the national average in all categories. And in “science” we
have the distinction of being the worst in the country.

Is that what we are going to build on for our future?

There is another lesson we can learn from Ireland and that is that a consensus must be forged
between what they refer to as the “social partners” – workers, employers and government – if we
are to progress as a society and not continually be stymied by changes in direction as fads or
personalities or parties change.

Because economic development will not happen within the timespan of a particular political
party’s time in office. Remember that the tax policies in Ireland dated back to the 1950’s – almost
60 years ago; their educational policies date back 50 years. If we are going to move forward we
cannot afford to have the path strewn with obstacles put there for political purposes every four
years. Neither can we have policies that favour only a small, elite portion of our population. It is
all of us who work – and as the paper rightly says – although maybe too many times – we are
“hard-working”. That’s why the West likes the migrants from the Maritimes. We work hard. But a
person cannot be expected to give 110% – as the saying goes – if they, at the same time, feel
that their work is not being valued by their own government.

In other words, we need to come together on a vision for the future of our province. We need,
more than ever, to arrive at a consensus.

In Ireland it was done through the National Economic and Social Council. That is a model that
should be looked at; one that very possibly could be applicable here. An independent advisory
body that is trusted by all New Brunswickers because it is composed of New Brunswickers who
represent the different strata within our society. They would listen to each other’s positions and
concerns and together hammer out a plan for the future that all can support. Its members would
be New Brunswickers who are respected, influential and committed to the future of the province;
New Brunswickers who live here and whose approach would incorporate the varied ideas of a
dynamic society. Together we could develop a vision for the future of the province that could be
supported by all levels of society.

Tax reform in isolation will achieve nothing – except perhaps the gratitude of a few of the
wealthier members of our society. And I’m not even sure of that because it assumes that all of
those in the “high-income” brackets do not care about their neighbours, about the welfare of the
society of which they are a part.

“Tax” is not a four-letter word. To quote the famous American jurist, Oliver Wendell Holmes:
“Taxes are what we pay for civilized society”.




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