Thursday, August 04, 2011

Nova Scotia’s surplus sparks accusations that taxes are too high - The Globe and Mail

This story is a good example of the politics of taxes:

Nova Scotia’s surplus sparks accusations that taxes are too high - The Globe and Mail

OK, everyone thinks taxes are too high or ... well ... do they? The complaint -- taxes are too high -- is something we learn to say. It is a matter of public discourse and something people say without thinking. This story is a classic example of this. Why? Well, because the only reasons the Conservatives are arguing taxes are too high is to try to get elected. In the process, they are not thinking of the good of Nova Scotia. Indeed, they are putting their own partisan interests ahead of the public good and, because of that, I shudder to think what would happen if they were elected.

Surely, someone will say, the fact that the government has extra money means that I should get a cut in my taxes? Intuitively, this makes sense, but not if we pause to consider the issue for several reasons.

First, how often does NS run surpluses? Imagine, for instance, that you're paid $100 per week. Because you have $100, you spend $100. One week, your boss decides to give you a bonus and puts your pay up to $120 for one week. Do you instantly start spending $120 per week? No. Because what happens the next week when your pay goes back to normal? You're $20 in the hole. You might spend a little mad money (go see a movie or something) but no adult of ordinary intelligence would suddenly ramp up their spending because of a one week different from the norm. If, in the longer run, you started earning $120 a week, then you would increase your spending but not before you knew you had $120 a week.

NS is like this. It is silly economics to assume that a one time surplus represents a long run trend, particularly when there are so many unknowns in the economy. The US debt crisis is far from solved; Italy and Spain are in serious economic trouble; the DOW dropped 500 points today. A prudent person would not make predictions in a situation where the future was so unclear and there were so many troubling signs on the horizon. Yet, to get elected, a political party will and what is most upsetting is that the people who run the Conservative Party know this. I have no secret network of spies providing me with information on the economy. I get my information from the media, the same place the Conservatives do. They know that prudence is called for in an unstable economic situation and they know that NS has a bad t track record of piling up debt (in other words, surpluses are unusual). Yet, they are willing to throw all that out the door for a few political brownie points. One might hope for better.

Second, and perhaps more importantly, there are other things that can be done with this money. There is a different between a deficit and a debt. The debt is the accumulated deficit, all those years NS ran in the red didn't disappear. NS borrowed money to pay for that deficit and like money that anyone borrows, sooner or later you need to pay it back. I don't know exactly how big NS's debt is, but a good guess might be $14 billion. That's right, $14 billion. Why not take some of the surplus and start paying back the debt?

This is a good idea because, just like a mortgage or a credit card bill, the longer you don't pay it back, the more interest you have to pay. Right now, NS pays interest on $14 billion worth of debt. Again, I don't have an exact figure (the provincial budget if you care to look it up would have debt servicing charges listed) on hand and I'm too lazy to look it up but that is a lot of interest and that interest is a dead waste. It produces nothing. It is money you pay -- and by "you" I mean taxpayers -- and you get nothing for it. It is a service charge for debt. You get no new bridges, no new teachers in schools, no extra fire protection, no potholes paved, nothing. Because you get nothing for it, the faster you can pay it off the better. The faster you can pay it off (or even hunks of it), the less service changes you have (because the less interest you pay), the more tax dollars can be directed to useful ends (like tax cuts, if one were of this mind). By paying off the debt, IOW, there is more money all around.

And .... what is more ... the Conservatives know this. They are not idiots. They've all had to pay mortgages and they all have credit cards and they can all do some simple math. The fact that they know this and chose to ignore it in order to score some quick points ... is disconcerting. One might expect better.

Finally, let's do some simple math on this surplus. According to the Globe the surplus will be $570 million (give or take). Sounds like a lot of money but don't get too excited too quickly because you (and by "you" I mean taxpayer), ain't gonna get $570 million in your pocket. NS has a population of 940 000 (give or take). I'm using conservative figures here just to be careful. This amounts to about 606.38 per person. But, you don't just get this figure for everyone who is in your family. Instead, the way our tax system works is that the amount deducted on your pay cheque is changed. So, instead of getting this amount, you'd get an extra $23.32 per pay before taxes. Since taxes are still going to be there, you need to deduct your marginal tax rage from this. Let's imagine its 37% so deduct $8.63 from the $23.32 you were getting every two weeks and you're now at $14.70 per person every two weeks!

Now, I admit that this figure is not accurate. Not everyone works and we could do some more math, allowing deductions for various things and extra money if you have kids, etc. However, the point would be the same. The amount of difference this will make on your pay check is limited. Very limited. It is not enough to help you buy a new car; pay off your mortgage early. It would get you dinner at McDonalds but that is about it.

My point is this: there is no big windfall coming to you even if all this surplus were put back into the hands of taxpayers. Rather than doing this, then, Nova Scotians should be sensible. They should think about their long-range interests and adopt a policy that is prudent, guards against economic instability, and creates more wealth for the province in the long run. Unfortunately, I suspect that the NDP will have to follow course and try to bribe taxpayers with their own money.

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