HST: One argument in favour

06Dec09

Robin Boadway, the David Chadwick Smith Chair in Economics at Queen’s University, gave his best effort at explaining the benefits of a harmonized sales tax to readers of the Ottawa Citizen. His answer was unequivocal: the revamped tax is good for Ontario. Most of the way down, Boadway points to the perceived flaws of the tax:

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.

Boadway spares no time in addressing those concerns. His next paragraph elaborates:

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.

Boadway admits that all taxes can’t benefit all of the people (or businesses) all of the time:

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.

Boadway sums it all up:

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.

And then, in his final words, Boadway calls out political opponents of the tax:

It would be irresponsible for opposition in either Ottawa or Ontario to derail it.

For more scintillating material about taxes: Read this NickTV.ca post from April, which links to this post by a former colleague of mine (and certified policy wonk) named Ross Prusakowski. Ross, a former student of economics and current economist in the wilds of Alberta, thinks the HST is solid policy.

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