PROMOTING TAX FAIRNESS IN NEWFOUNDLAND AND LABRADOR THROUGH THE PERSONAL INCOME TAX SYSTEM
Collaborative Applied Research in Economics (CARE)
This paper, utilizing various technical indices, analyzed both progressivity and fairness for the Newfoundland and Labrador personal income tax system. In particular, tax fairness was evaluated in terms of both horizontal and vertical equity. The conclusion from this analysis is that both taxes and transfers have made the Newfoundland and Labrador system more progressive. In terms of reducing income inequality associated with market incomes, government, transfers seemed to play a greater role than taxes. The analysis presented in this report demonstrated that the incidence of low income has diminished over time, but it still exists for many individuals and families. Consequently, it remains a concern. Moreover, the number of individuals and families who could be classified as being in the “poorest of the poor” group seems to have been relatively constant. In other words, members of this group seem not to have benefitted from the improved prosperity to the same extent as other family units within Newfoundland and Labrador.
A basic premise of this research is that it is important for Newfoundland and Labrador to remain competitive with other provinces and not to produce major behavioural disincentives that might be manifested in terms of tax evasion, lower productivity, or out-migration to another jurisdiction in response to higher Newfoundland and Labrador taxes. Additionally, it is an operating assumption of or a value judgement implicit in this research that if funds are to be redistributed using the income tax system, then these funds should transferred to or targeted at low income households that are most in need. Individuals and families in this low income category, as demonstrated in the research presented in this report, could be identified through the use of the Market Basket Measure of low income for each community within Newfoundland and Labrador.
To meet the primary objective of this paper, five illustrative policy options were developed that would, if implemented, decrease income inequality through the provincial tax/transfer system.
The following five scenarios, which involved approximately the same amount of funds to be redistributed beyond the existing base case, were considered:
Scenario 1. Introduces a new low-income credit which is based on the Newfoundland and Labrador Market-Basket Measure (NLMBM) of low income to replace the current Newfoundland and Labrador Harmonized Sales Tax (NLHST) credit. To ensure revenue neutrality, this new, low-income transfer is assumed to be funded through the combined effect of eliminating the NLHST and increasing the provincial tax rates applied to additional income tax brackets that are introduced for Newfoundland and Labrador taxpayers at the upper end of the income distribution;
Scenario 2. Involves a higher basic personal exemption applied to Newfoundland and Labrador taxable income. To ensure revenue neutrality, this change is funded by the higher tax rates and additional tax brackets at the upper end of the income distribution that were specified in Scenario 1. As well, the NLHST remains in place unaltered;
Scenario 3. Reduces tax rates for lower income individuals. To ensure revenue neutrality, this change is funded by the higher income tax rates and additional tax brackets at the upper end of the income distribution that were specified in Scenario 1. The tax brackets are identical to those assumed in Scenario 1, but the lower tax rates are assumed to change;
Scenario 4. Enhances the NLHST credits. To ensure revenue neutrality, this enhanced provincial HST credit is funded by higher tax rates and additional tax brackets at the upper end of the income distribution; and
Scenario 5. Analyzed the NLMBM credit when it was funded by both a surtax on the highest income tax bracket and the elimination of the existing NLHST credit.
While all the scenarios increased the progressivity of the tax system, Scenario 4, an extension of the existing NLHST credit, seemed to dominate. Scenario 1 was second in terms of the contribution to reducing after-tax income inequality. Considering these two scenarios, an interesting trade-off emerged. Scenario 4 probably reduced income inequality more than Scenario 1 because it affected more people, whereas Scenario 1 affected fewer people, but was more precisely targeted those most in need.
The mandate of this study was not to make a recommendation, but to inform the public and the decision-makers and, by doing so, to promote informed discussion on income inequality and the progressivity of the income tax system in Newfoundland and Labrador. Hopefully, this study was successful, at least when measured against this metric of facilitating informed debate!
If you any questions, please contact Wade Locke, Department of Economics, Memorial University, 864-8104, wlocke@mun.ca
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