HST: one argument against

06Dec09

The Ottawa Citizen did its due diligence on Friday, when it gave a whack of space to the debate about the benefits and pitfalls of a harmonized sales tax. Robin Boadway argued in favour of the tax, while Susan Eng (the vice-president, advocacy for CARP, which is Canada’s largest national advocacy group for older Canadians) opposed it.

It looks like this debate’s chief proponents and opponents have appealed to two arguments:

  • Economists are framing the issue as one of economic efficiency
  • Populists are appealing to widespread popular opposition

Both of these groups involve politicians, which means this debate rages inside and outside of legislatures. Anyways, here are excerpts from Eng’s piece in the Citizen:

Nobody likes new taxes. Some see the longer-term economic benefit from harmonizing sales taxes. Some can afford the extra consumer taxes. Others cannot.

But everybody hates politicians playing games instead of negotiating fundamental changes to protect those who can least afford more taxes.

For good reason: “No taxation without representation” was a rallying cry for American colonists resisting British taxes. One of the most important rights we have as citizens is not to have a tax imposed on us without our consent.

CARP polled its own members — aging Canadians. Here was the question, followed by the “resounding” answer:

Suppose the federal Conservatives, or the B.C. Liberals, or the Ontario Liberals, actually ran an election on the premise that in order to improve the investment climate for business, there had to be a new consumer tax burden. Would they be in government today? Would the Ontario Liberals have their overwhelming majority to push the legislation through Queen’s Park?

The answer is a resounding “No,” according to CARP’s polling of its members. More than 5,700 people polled made their views perfectly clear: Enough would have changed their votes to make a difference in the outcome.

And, in sum:

Older Canadians have paid their fair share for the common good and even now as they face an uncertain retirement might yet be convinced to do more. But they want to be asked first.

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One Response to “HST: one argument against”

  1. 1 George Keeming

    “Is HST good for Ontario?; More efficient tax system, more efficient economy” Ottawa Citizen, Robin Boadway, Dec 52009

    The HST seems to be a hard sell with the public and with opposition politicians at both the provincial and federal levels of government. This is so, despite the fact the value-added tax (VAT), of which the HST is an example, is the consumption tax of choice in more than 100 countries in the world and is favoured by the vast majority of Canadian economists. The economic arguments for the HST are clear and several.
    First, the HST, unlike the current provincial sales tax (PST), is non-discriminatory. It treats all consumer purchases equally rather than favouring most services at the expense of goods. Coincidentally, the broader tax base to which the HST applies allows a given amount of government revenue to be raised at lower tax rates. Next, the HST removes a tax disadvantage that Ontario firms face relative to their outside competitors. A significant proportion of tax revenues under the PST, of the order of 30 per cent, come from the purchases by Ontario firms of business inputs from retailers. These taxes become embedded in the final selling price of products, which make it more difficult for Ontario producers both to sell their products abroad and to compete against imported goods. The HST avoids these difficulties. Because of the multi-stage nature of the tax, firms who pay taxes on their inputs are relieved of them by an input tax credit. This implies that products exported from Ontario have been fully purged of the HST, while imports into Ontario pay the full HST. This levels the playing field and enhances the competitiveness of the Ontario economy, which is of critical importance given the pressing structural difficulties now upon us. Further, the harmonization of the Ontario sales tax with that of the federal government and other participating provinces has significant administrative advantages. The collection of the tax for both levels of government by a single agency — the Canadian Revenue Agency — economizes on costs for both taxpaying firms and governments. Administrative duplication is alleviated and compliance is simplified for taxpayers. Compliance is also facilitated by the crediting mechanism, which creates a paper trail that can, if necessary, be used to verify that tax liabilities have been met. This is especially important on cross-border transactions among participating provinces. All in all, the HST represents a welcome harmonization of federal and provincial sales taxes that contributes to a more efficient tax system and a more efficient economy. Of course, the HST on its own is far from perfect, as its naysayers frequently point out. The substitution of the HST for the PST in the absence of other measures would, by broadening the base while keeping the Ontario sales tax rate unchanged at eight per cent, increase provincial tax revenues and cause the prices of most services to rise. Undoubtedly, the burden imposed on low-income Ontarians, including especially the poorest among us, would increase, perhaps even proportionately more than the extra burden imposed on those with higher incomes. These consequences would be highly undesirable if they were allowed to stand. However, the tax reform crucially involves more than simply the replacement of the PST with the HST. It includes accompanying measures to undo the most adverse effects of the HST. Most important, enhanced refundable tax credits to low-income Ontarians compensate for any increased prices they might face on the services they purchase. More generally, income tax relief makes the overall tax reform package revenue-neutral. As well, the one-time funding being paid by the federal government to the province, and the redeployment of Ontario revenue employees would cushion transitional costs. These accompanying measures taken together with HST itself makes the overall tax reform both fair and efficient. That is why economists favour it. Needless to say, no policy reform can be beneficial for all. Some industries, whose products have been relatively favoured under the current tax regime, will be faced with higher taxes. This includes most service industries and utilities, like home heating. The ideal of an all-inclusive tax that treats all goods and services alike will remain elusive, as a few products continue to be tax-exempt. As well, there are arguably some transactions that are taxable even though they do not really represent consumption products, such as financial services. Such anomalies can readily be dealt with over the longer run. What is important now is that the best overall tax structure be put in place. These shortcomings are only blemishes. The pluses of the HST reform package far outweigh the minuses, and the neediest among us are protected. Much remains to be done to address problems of poverty in Ontario, but these call for anti-poverty measures rather than resisting important reforms of the currently inefficient tax structure. The Ontario economy has been shattered in recent years by the twin storms of an overvalued Canadian dollar at least partly induced by a badly managed resource boom in Western Canada and a precipitous decline in export demand from the United States. The HST reform is clearly one element of many that will help Ontario to gradually recover and become once again the employment engine of Canada. It would be irresponsible for opposition in either Ottawa or Ontario to derail it.


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