A better way to help low income Nova Scotians

Guest post by Michael Bradfield, Professor of Economics (Retired), Dalhousie University, and James Sawler, Associate Professor of Economics, Mount Saint Vincent University

Economists use the term “economic 101ism” when politicians and commentators apply the simplistic theories in introductory economics courses to complex economic problems. There is certainly an abundance of economic 101ism in Nova Scotia politics, and the recent minimum wage debate is a perfect example. Despite the claims of political commenters to the contrary, the most recent studies conclude that moderate increases in the minimum wage have little or no negative effect on employment.

In rejecting a minimum wage increase, Premier McNeil claims it would lead to inflationary pressures. Back-of-the-envelope calculations reveal that McNeil’s assertion is a gross exaggeration. Minimum wage earners, at $10.70 an hour, are about 6% of Nova Scotia’s wage earners who had an average hourly wage of $22.07 in 2015. Thus minimum wages make up less than 3% of overall wages in Nova Scotia (As a higher proportion of minimum wage earners are part-time workers, the precise figure is even less).

The NDP proposal to raise the minimum wage to $15 over a three year period amounts to approximately 13.4% per year. As this applies to less than 3% of all wages, the proposed annual increase represents less than 0.4% (4 tenths of 1%) of Nova Scotia’s total wage expenditure. Furthermore, wages are roughly half of firms’ costs and firms pass only a fraction of increased costs onto consumers. Thus, the inflationary effects of a $15 minimum wage would be negligible — barely discernible from statistical noise.

Instead of increasing the minimum wage, McNeil prefers to help low income Nova Scotians by raising the basic personal exemption on our income tax. However, raising the basic personal exemption is an ineffective and costly way to help low income Nova Scotians.

If the basic personal exemption were raised by $1,000. Nova Scotians earning less than their current basic exemption and other tax credits would receive no benefit, while others in the lowest tax bracket would receive a maximum benefit of only $87.90 ($1,000 times the 8.79% marginal tax rate). This contrasts with the $210 ($1,000 times 21%) benefit guaranteed to those in the highest bracket. Thus, a policy which McNeil — and the business lobby — asserts is to help the poor mostly benefits the rich.

If Premier McNeil wants a tax policy which directly assists low income Nova Scotians, he should make the provincial tax credits REFUNDABLE. That would mean that all Nova Scotians with such low incomes they cannot use all of their tax credits would then receive a rebate of the difference between their taxes and the tax credits for which they are eligible.

Using a refundable tax credit could cost less than McNeil’s approach because the refundable tax credit gives no tax breaks to the 45 % of Nova Scotians in tax brackets above the lowest. And if he is concerned about raising revenues, he could also define “taxable income” as the total income from the Federal T1 tax form and shift income deductions on the federal form to tax credits at the lowest bracket rate so that these items would have the same benefits for all taxpayers, rather than provide the most benefit to those with the highest incomes, as treating them as tax deductions does.

Thus, a few tax changes can make the tax system more fair, provide extra income for low income Nova Scotians, and increase government revenues.