An important measure of the impact of taxes on the economy is ‘tax effort’. Tax effort refers to the amount of tax revenue redirected to fund public services and infrastructure relative to the potential revenue base. The level of tax as a share of GDP is often used as a measure of tax effort.
The following figure shows the total amount of the economy’s output redirected through the tax system in major developed countries:
- Nova Scotia’s tax effort (taxes make up 33.9 per cent of provincial GDP) is comparable to other industrialized countries.
- Canada’s tax effort is just over 33 per cent of GDP
- Denmark and Sweden have high the highest tax effort in industrialized countries (and lower METRs)
Global Tax Effort Comparison
(Click chart to enlarge)
Tax yield (revenues collected per capita) is a useful companion to tax effort. It allows for an assessment of the level of government revenue raised for a given tax effort.
The figure below illustrates a few key features of the tax system in Nova Scotia:
- Over one-third of provincial GDP is redirected into government tax revenues, above the national average.
- Nova Scotia’s tax revenue per capita is well below the national average
Tax Effort and Tax Yield across Canada
(Click charts to enlarge)
Nova Scotia has a high tax effort and a low tax yield. This suggests a relatively weaker economy relative to other provinces.