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We need more high income earners, sorry about that

February 25th, 2014 Leave a comment Go to comments

When I post that New Brunswick needs more higher income earners (or when I say more wealth) this tends to rankle some of my readers.  I will get a number of comments, emails and even telephone calls – mostly polite – saying New Brunswick doesn’t need more fat cats.

I have crunched the numbers 10 ways to Sunday and I can’t find a scenario where New Brunswick gets on a sustainable path without more folks earning higher incomes*.  Now, I guess we can debate ‘sustainable path’ but I define that as having an economy that is generating enough tax revenue to pay for public services and infrastructure without over reliance on federal transfers and without having the highest taxed regime in North America.

*If the province started to generate a massive royalty stream from natural resources – we would be less reliant on employment income to fuel the provincial budget - but those industries tend to offer higher wage jobs anyway.

The first table below breaks down the all those who earned any kind of income in 2011 by the level of income and compares New Brunswick to Canada as a whole.  Above $50k per year, New Brunswick starts to fall off significantly for the relative share of its income earners.  We have nearly 40 percent fewer folks earning between $100-150k and 61 percent fewer earning $250k or higher.

When you look at who pays the taxes, it tends to be the folks earning higher incomes.  The table below shows the implicit income tax rate by income bracket before deductions.  Statistics Canada also provides actual taxes paid (after deductions) by quintile and you get roughly the same thing.  The top quintile of earners (top 20 percent) pay over 60 percent of all income taxes in New Brunswick.

The problem is that our government is heavily reliant on personal income and on progressive income taxes.  The New Brunswick government generates a tiny fraction of its revenue from corporations – either income tax or property tax.   The vast majority of its own-source revenue comes from taxes and fees on personal income.

Progressive income taxes are a good thing.  Those who earn more should pay more.  But if you have an economy with 50 percent fewer people earning over $100k either you get that money from somewhere else (i.e. the feds) or by taxing those in the middle that much higher – or by a combination of both.

As I have written before, the average household in New Brunswick with an income of $100,000 will end up paying between 35% and 40% of their total income to taxes – all forms (income, HST, property, gas, etc.).  I am not sure this average household can afford to be taxed any more.

So, we need new streams of revenue (royalties would be nice) and higher income earners.   Higher income earners (excluding the public sector) come from highly skilled jobs or have significant returns on their investments (dividends, etc.) – or both.

Does this mean I reject any efforts to attract investment and create jobs in lower wage sectors?  No.  There are tens of thousands of New Brunswickers who need a job right now with fairly basic skills.  Those folks deserve a chance at a decent paying job just like the rest of us.

But we should be looking at some of the opportunities in higher wage sectors (oil and gas, ICT, bio, professional services) and figuring out if there is anything we can do collectively to foster investment and jobs.

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  1. February 25th, 2014 at 09:59 | #1

    Bang on as usual David. Any gov’t incentives should be tied to wage levels. Rarely do we hear average expected wage levels in job announcements.

    Higher wage jobs are also key to attracting people to move to NB. It is a rare thing for somebody to move for a pay cut.

  2. February 25th, 2014 at 10:05 | #2

    Well put. I do wish there was some one blogging about Nova Scotia in this fashion.

    Thanks

    Richard Quigley

  3. Oliver D
    February 25th, 2014 at 11:39 | #3

    Great post, one that all of the New Brunswickers who complain about people earning upper-middle class wages should read. There’s a lot of animosity towards people who are in the top 10-20% of earners in the province and obviously these people have no perspective on who exactly is contributing the most to the provincial coffers.

  4. richard
    February 25th, 2014 at 18:37 | #4

    I am surprised that there has not yet been a comment to the effect that higher corporate tax rates would solve all those revenue stream problems. But perhaps someone is on vacation :)

  5. Andrew
    February 26th, 2014 at 17:17 | #5

    Well, this is precisely why no one with the capacity to earn money, wants to be here.

    You have a perfect illustration of a penalty chart. It shows very succinctly, that the more you make, the more you are penalized. Wow, what a great incentive!

    Let’s look at this model another way. Could you imagine if a startup presented this kind of ‘growth’ model to potential investors ? The lulz….

    What if a public companies growth was forecast like this – could you imagine ?

    Exactly.

    Why would you want to become one of the 20 out of 100 people who pay for 60% of everything, while the guys who pay 40% have 80% of the benefit – and utilize more than 90% of those resources (important to note).

    If you don’t think taxing business much appropriately is warranted, as apparently Richard doesn’t – I think you’re 101% kidding yourself.

  6. mikel
    February 27th, 2014 at 11:47 | #6

    Good analysis, but I think you are misunderstanding your critics. You can’t MAKE somebody earn more in business. I don’t think ANYBODY would argue if the Lazaridis’ moved to New Brunswick. When Radian 6 was sold, very few people were criticizing it, except for the obvious reasons. But nobody was criticizing the head honcho’s who made lots of money.

    But this is New Brunswick, so when you say you need more high income wage earners, what that reads like is “NBPower CEO salary is justified”. Or “we should pay bureaucrats a lot more money to get them into that bracket”.

    I have never read a single story of a business that succeeded and made more money from a critical angle. UNLESS that company did so by government aid.

    So if you are arguing that a whole bunch more people should have even more success in their business, I don’t see ANYBODY griping, unless to do that its to get a big cheque or resources from the government. Hey, write the next Harry Potter series, make a bajillion dollars like whatshername, and then find me ONE New Brunswick who will argue that its a bad thing because of all the reasons you mention.

    And finally, come on, average tax rates on 100 grand are more like 30%, not 40. If you can’t living happily on 100 grand, then you are just spoiled. The vast majority of people are making far far less. And if you run your own business, its a good bet you are making that decent salary on something you love doing-which is hardly the case for those earning 30 grand. But its NOT those earning big money that people get irate about-its the fact that MOST of those earning those salaries are public employees, and usually the ones who contribute the least. And in NB, its mostly the 1%, not the top 10-20 that people have real issues with.

  7. richard
    February 28th, 2014 at 19:00 | #7

    @Andrew
    ” It shows very succinctly, that the more you make, the more you are penalized. Wow, what a great incentive!”

    That is common to the progressive income tax systems used in many OECD countries; there is not much evidence that is a powerful disincentive to earn more or not invest.

    You can search the archives here for info on likelihood of gaining much more in revenue from raising business taxes.

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