Saturday, November 14, 2009

HST as seen through Alice’s looking glass

The debate over the introduction of the Harmonized Sales Tax (HST) in Ontario and British Columbia is getting curiouser and curiouser, as Alice would say. In fact, the entire Canadian debate on value added tax has a decided Alice In Wonderland sense to it.

The two-part HST value added tax with its federal and provincial components became a part of the Canadian tax regime in the 1990s after the federal portion (GST) had been implemented by the Brian Mulroney Tories as a replacement for the export-killing 13.5 per cent Federal Sales Tax. In a stunning 180 degree turnabout, however, Jean Chrétien’s Grits embraced the GST after successfully campaigning against it.

The Liberals, who had opposed the value add tax concept, once elected, encouraged New Brunswick, Newfoundland and Labrador, and Nova Scotia to merge their provincial sales taxes with the more efficient, business investment friendly GST. So the Liberals were the first political party to do a complete about face on value added tax; they were not, however, the last.

The Tories also seem to have an ambiguous view of the unpopular value added tax. While at the federal level Tories seem to embrace the concept—after all, they introduced it—at the provincial level they are attacking it hammer and tongs. Against all logic, Tim Hudak’s Progressive Conservatives are opposing Dalton McGuinty’s plan for harmonization in favour of retaining the expensive-to-administer, investment-killing Ontario Provincial Sales Tax.

Mr. Hudak’s party could campaign for a lower rate of tax to decrease the burden on Ontario consumers, but have chosen instead to oppose harmonization outright. A wrong headed decision, but a politically popular one, apparently.

The New Democrats have opposed value added taxes from the beginning—even reversing an early attempt at harmonization in Saskatchewan shortly after the GST was introduced in 1991—and seem to have won a recent by-election in BC by opposing harmonization there. However, that same party screamed bloody murder when Stephen Harper’s Tories lowered the federal portion from seven per cent to five percent.

Is it or is it not a good idea to use a value added tax as part of our tax regime in this country? From watching the antics of all three national political parties, one will assume the answer is, it depends. While parties are in power they like it, when in opposition they hate it. Except, of course, the Dippers—they like it when the Tories want to reduce it, but hate it if the provinces try to introduce it. Phew!

Is it any wonder that so many Canadians are fed up and can’t be bothered to turn up at the polls for elections?

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© 2009 Russell G. Campbell
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  1. You should probably define what exactly is a "value added tax" in your blog if you are going to reference it that often. One person's "value added tax" is another person's consumption tax. The HST in BC is going to add a new tax to 20% of consumer goods and no tax is being eliminated to offset the cost. This is "added tax value" to the Provincial government.

    Adam Smith regarded consumption as the root of all economic activity. Marx despised consumption as the corrupting root of all evil.

  2. Agreed Hudak is making a tactical mistake. Will he repeal it once it is implemented?

    He should call for exemptions on specific items and will introduce those measures if elected.

    Fuel, heating oil, rebates on people with low or fixed income.

  3. The_Iceman, the definition of value added tax is well known and virtually universal. I just got 20,900,000 hits on Google, for goodness sake.

    Adam Smith also famously said that the purpose of production is consumption, i.e., Smith's Law. So what's your point?

    And why do you think I'd give a rat's ass what Marx had to say about consumption, or anything else, for that matter? And anyway, if consumption is so terrible for you, don't consume--think of all the tax you'll save.

  4. CanadianSense, if elected, Tim Hudak will not repeal the HST--he may, however, fiddle with it to save face, IMHO.

    As I've said before, the rate of tax is much too high and I worry about the regressive nature of the tax, but it's much better than the current PST--several orders of magnitude better.

    Mine is the majority position among economists and tax experts.

  5. I am a capitalism loving economist, and a conservative blogger. I know what a "value added tax" is alleged to be, but I guarantee that at least 80% of the people who read the post won't know what it is. I think “value added tax” is a hypocritical oxymoron, and the 50 grand I dropped on my honours Degree in Mathematical Economics affords me the right to have that opinion. You just keep calling the HST a value added tax when the only thing it is adding value to is government coffers. I am happy to debate economic policy with you.

    I cited Smith and Marx to highlight how the two sides of the spectrum feel about consumption. Why did I do that? Am I a Marxist? No, adding HST to non taxed goods is adding a consumption tax on consumed products. You are therefore inhibiting consumption, economic activity, all in the name of increasing government revenue. It is simple mathematics, not some delusional fairy tale fantasy. In the case of the HST, the extra revenue is going to free spending provincial governments, not to Ottawa.

  6. Tax resistance starts to become a problem once sales taxes rise above 10%, so the sensible thing to do would be reduce the PST portion to 5% and have a 10% HST across the board.

  7. Dennis,

    As you know, VAT is intended to ensure that only the value added by the business providing the good or services is taxed. Properly administered it prevents tax cascading, whereby a product may be taxed multiple times at different stages of production.

    I am convinced that a VAT is far better than the current Ontario PST, and that GST was a huge improvement over the old FST/MST. I don't know the BC situation well enough to comment, but I assume it's similar to Ontario.

    However, whether ANY consumption tax, including VAT, should be part of our tax regime is a debate for another day.

    Here's what Greg Mankiw, professor of economics at Harvard University had to say recently about VAT:

    "My bottom line: If I could replace our current tax system (including the personal income tax, corporate income tax, payroll tax, and estate tax) with a VAT, I would gladly do it."

    Here's a quote from Don Drummond, TD Bank's Chief Economist:

    "… a value added tax is a more efficient tax than the provincial retail sales taxes currently in place in both Ontario and B.C. Thus, harmonization is an important
    step to increase the competitiveness of these provinces' economies and complements actions the two governments have taken on capital and corporate income taxes."

    I quote Mankiw and Drummond because they hold the majority view among economists regarding the efficiency of VAT. HST is a VAT, so you'd probably have a tough time convincing most of your colleagues that there should not be a VAT in BC to replace the current provincial sales tax regime.

    Personally, I dislike all consumption-based taxes, but that was not the point of my post. I was simply pointing out the ambiguity of Canadian political parties on the subject VAT/HST/GST.

  8. Excellent point, Thucydides. Well said.

  9. Reading the previous comments, I think the fuss about the value added tax is missing the point. The HST tax reform package is about creating jobs. Jack Mintz is saying that it will create almost 600,000 new jobs and finally increase wages for Ontario families. The fact that Hudak favoured harmonization and now opposes is bad enough. The fact that he continues to oppose it despite the jobs it will create reduces him to a politician putting political ambition ahead of the needs of Ontarians

  10. HST good points:

    it's a VAT, which is well covered above already.

    Ontario's economy is shifting from manufacturing based to service based, and HST ensures that structural provincial revenue will not suffer as a result.

    Almost every business that is capital intensive LOVES the HST.

    HST Bad Points:

    Price sensitive services (private schools, private contractors, etc) will suffer, at least initially if not permenantly, from sticker shock.

    HST is not revenue/cost neautral, it's a tax increase for almost every taxpayer. Just like the GST, which was also sold as 'revenue neutral'.

    The 'jobs' prediction is typically based on a number of assumptions that either haven't held true, or won't hold true based on our shifting economy.

    No one likes to pay more tax, ever, but this one helps out manufacturers compared to the current model, and a tax based on consumption is very cnsistent with a progressive tax system, of which i'm a fan.

    I don't fault McSquinty for this one, but it's a strike in my book for Hudak. He's trying to suck and blow at the same time, and that's never flattering.