And three, simplifying the tax, with a common federal and provincial tax base and an integrated collection system—though this is attenuated somewhat by the exemptions I mentioned.
Why is a broader tax regime to be preferred? Because you want people to make economic decisions, whether as consumers, workers or investors, based on the real costs and benefits of their choices—not the tax preferences attached to each. Every sector that was previously exempt from PST in each province is now bitterly complaining of ill treatment. But all they are really saying is that they were the beneficiary of special treatment before.
Does this amount to a “tax grab,” as so often is complained? It would, if the only thing being contemplated were a simple broadening of the existing sales tax base. But harmonization doesn’t just mean a broader tax: it also means rebating the tax on business inputs. So while the price of some goods will undoubtedly rise as a result of the reform, the price of others will fall.
Yes, fall: where the tax was previously built into the price of intermediate goods, to be taxed again at the next stage of production, and the next, and the next, until it has compounded to who knows what level, now the consumer will pay only the official rate. Many goods that are now subject to the PST, therefore, will see absolute price reductions. Even goods that were untaxed until now—at the retail level—may see little or no price increase, once the tax on inputs drops out. Because, in effect, they were taxed: it was just buried in the price.
I know this conflicts with the invincible folk-economic wisdom that no cost savings are ever passed on to the consumer, but are simply pocketed by business, who are, all of them, colluding in a massive nationwide price-fixing scheme and can just charge whatever they like (why do prices ever fall, then?). But in fact that’s exactly what happened in the provinces that previously harmonized: a study for the C.D. Howe Institute found prices in the Atlantic provinces generally fell by 0.3 per cent, while some large items fell as much as three per cent. The same happened when the GST first came in, as a replacement for the old Manufacturers Sales Tax.
(Ah, the GST. We all know what happened there, don’t we? As a recent National Post editorial put it: “Canadians were assured the GST would be revenue-neutral when it was introduced two decades ago, and look how that turned out.” Yes, let’s look, shall we? In its last full year, 1989-90, the MST yielded some $17.7 billion: equivalent to 15.3 per cent of federal revenues, or about 2.7 per cent of GDP. In 2005-06, the last full year before the Harper government began cutting the GST, the tax yielded $33 billion. Tax grab? Hardly. In fact, that was down to 14.9 per cent of revenues; as a share of GDP, it was also down, to 2.4 per cent.)
Do the price reductions in some goods completely offset the price increases on others? No. But the extra costs hardly justify all the caterwauling. A study by TD Bank projects a net increase in prices from Ontario’s HST of 0.7 per cent. The Ontario Chamber of Commerce puts the extra per capita cost at less than $70, while the B.C. government says a single person earning $25,000 will pay just $13 more a year. Of course, to those on very low income, that’s still an extra burden they can hardly afford. But here’s the thing: they don’t have to. Both provinces are beefing up their existing low-income sales tax credits as part of the exercise, in amounts that exceed any addition to the cost of living.
And just in case the rest of us feel left out, both provinces are also bringing in middle-class tax credits—$1,000 per family in Ontario—and income tax cuts. Add it up, and both provinces stand to lose significant sums from the reform, though both are compensated by the transfer of billions of dollars from the federal treasury. You wouldn’t think provinces would have to be bribed to do the right thing, 20 years too late, but there you are.
So it isn’t a tax grab. And it isn’t just a tax cut for business. But it is that, too: while most of the savings, according to the TD Bank, get passed on to the consumer, the rest—$6.9 billion—goes to reducing the cost of investment. The C.D. Howe Institute has calculated sales tax reform will reduce Ontario’s marginal effective tax rate on capital by 11 percentage points. Its former president, Jack Mintz, in a new study for the University of Calgary’s School of Public Policy, estimates this will trigger more than $47 billion in new investment in the province over the next decade, and 591,000 new jobs.
Indeed, the benefits of harmonization are so great that it is difficult to imagine either provincial government backing down. Before too long, Ontario and B.C. will be followed by Manitoba and Saskatchewan (Alberta has no sales tax), whose industry will be anxious not to be put at a competitive disadvantage relative to their neighbours. Harmonization will become the status quo, to be defended as fiercely as once it was opposed.
Pages: 1 2
