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The Progressive Economics Forum

HST Opacity

A couple of days ago, I took part in a TV Ontario panel about sales-tax harmonization.

I emphasized a couple of points that will be familiar to readers of this blog. First, harmonization is unlikely to have much effect on capital investment because many capital goods are already exempt from the existing provincial sales tax.

Second, if the principle is to tax business profits rather than business inputs, the removal of sales tax from business inputs should be combined with a corresponding increase in the corporate tax rate on profits. But the Government of Ontario is doing the opposite: slashing its corporate tax rate from 14% to 10%.

A couple of times on the program, Don Drummond said, “everybody else is moving/going to 10%.” However, only three other provinces – BC, Alberta and New Brunswick – have enacted 10% corporate tax rates.

According to KPMG’s summary, scheduled rates for 2011 are 12% in three provinces (including the two that border Ontario), 14% in Newfoundland and Labrador, and 16% in the remaining two Atlantic provinces. The only other planned corporate tax cut is Manitoba’s eventual goal of 11% when finances permit. By announcing a 10% rate, Ontario is leading rather than following this race to the bottom.

Another point that this discussion underscored for me was how little fiscal information we have about harmonization. The government has offered no estimate of how much additional revenue it will raise by adding provincial tax to a range of consumer goods and services. Similarly, it has provided no breakdown of how much revenue will be lost by exempting different types of business inputs.

Michael Smart and Richard Bird estimated such figures using 2002 input-output data and assuming complete harmonization with the GST. Whatever the HST’s merits or demerits, it is strange that Ontario’s Finance Ministry has not provided more current numbers based on the proposed incomplete harmonization.

The provincial budget indicated only that the sum total of these tax additions and tax exemptions will be an extra $2 billion of annual revenue. The provincial government will temporarily gain a further $1 billion of annual revenue by continuing to tax some business inputs.

After the budget, the media reported that business would save $3 billion per year immediately following harmonization. Summing these numbers implies that consumers will be paying an additional $6 billion annually.

On TVO, Len Crispino from the Chamber of Commerce said that Ontario business currently pays $5 billion per year of sales tax on inputs. Adding the HST’s net revenue increase of $2 billion implies that consumers will be charged $7 billion more each year.

Of course, there is a case to be made that $6 billion or $7 billion of additional consumer costs is a price worth paying to encourage more business investment in Ontario. (I would question this case on the grounds that many capital goods are already exempt from provincial sales tax.)

It is probably true that some business tax savings on inputs will be passed through to consumers as lower pre-tax prices. Therefore, the net increase in after-tax consumer costs will likely be less than $6 billion.

TD Economics, which assumes an extremely high degree of pass-through, estimates that the HST will increase consumer prices by 0.7% in Ontario. Given annual consumer spending of almost $350 billion in the province, that estimate suggests a $2.5 billion cost to consumers.

Obviously, the additional cost must be at least $2 billion because the government will collect that much additional revenue. (Suggestions that harmonization could actually lower consumer prices seem to posit that businesses will pass-through substantially more than 100% of their savings.)

However, to have a serious debate about the HST’s ultimate economic incidence, one would first need figures on its initial statutory incidence. So far, the Ministry of Finance has not provided any.

Enjoy and share:

Comments

Comment from janfromthebruce
Time: October 16, 2009, 4:37 pm

Well Erin either the feds don’t know – thus guessing – or they do know but don’t want Ontarians and BCers to know and thus create a public outcry. Kind of like when Harper said he wasn’t running a deficit in 2008 he was already 6 billion in the hole. Ditto for 2009.
Pleading ignorance appears to work!

Comment from Jonathan Chapnick
Time: October 17, 2009, 2:10 pm

It was disheartening to listen to the rhetoric and misinformation of some of the other panelists. Your performance was admirable. Thanks, Erin.

Comment from Brian Dell
Time: October 18, 2009, 7:38 pm

The relevant metric for comparison across jurisdictions ought to be the METR not the statutory corporate tax rate.

Comment from MJ
Time: October 19, 2009, 6:26 am

I am in favour of shifting the tax base from income to consumption. This is consistent with the idea of ecological fiscal reform: tax the bads (consumption and pollution) and encourage the goods (corporate and personal income). I support the HST harmonization, so long as low and middle-income Ontarians receive corresponding support. I understand the government is doing this, but I don’t know enough about the particulars.

I also oppose the GST cut… how nice that revenue would look right about now for the feds….

Comment from Travis Fast
Time: October 19, 2009, 6:36 am

“The relevant metric for comparison across jurisdictions ought to be the METR not the statutory corporate tax rate.”

why? because you say so?

Comment from Erin Weir
Time: October 19, 2009, 9:02 am

I was responding to Drummond, who compared statutory corporate tax rates.

But on METRs for manufacturing, Finance Canada made the following observation in its 2006 Tax Expenditures and Evaluations: “the five provinces that levy retail sales taxes generally offer some exemptions for capital inputs . . . As a result, retail sales taxes raise the Canadian METR by approximately 2.5 percentage points, compared to the 9 percentage points that would prevail in the absence of any exemptions.”

Comment from travis fast
Time: October 19, 2009, 10:59 am

Ontario better see a measurable increase in investment and volume of exports over the next cycle compared with the last. Not to mention employment, as that is how the minister is selling it.

Comment from Barrie Hebb
Time: October 22, 2009, 12:12 pm

I see this as partially a redistribution in a different way. Currently consumers pay a PST in Ontario and some goods are exempt. About 40% of the PST revenue according to some estimates comes fromt he PST that businesses pay on inputs. By hamronizing, these input taxes are removed as the tax is only charged on the final price.

The forgotten part of this story in the mass media is that businesses do not really pay that 40% of the PST on inputs. Ultimately, that is paid for by people. Businesses sell their products, they get revenue, and they use that to cover costs, including the PST they pay. Ultimately, consumers did pay for that PST in some way shape or form – because that money was taken from the money consumers paid to businesses and transfered to the government.

As businesses no longer have to charge this extra cost, they will be able to have more funds for 1. buying inputs, 2.hiring labour, 3, more profits, or investing. Which they will still have to recover by charging consumers.

If the province still wants to have the same revenue, they still have to make up for this in some other way and still, ultimately, get that money from consumers. If businesses spend 1 cent of their savings on anything, that 1 cent of lost tax revenue will have to be charged to a consumer instead on top of the 1 cent they already paid to the business that used to go to the tax.

Thus, there is reason to suspect at the margin that consumers will likely end up paying somewhat more if businesses invest, etc. because that tax revenue will have to be added onto what used to be taken away.

How large of an effect will depend on how successful businesses plan to invest, and since the economy is well below capacity, I suspect the short term answer is a small amount – businesses likey will not have the desire to use the savings to invest and givent he recession and competition, for many goods they will be forced, under these conditions, to pass along quite a bit of savings – not really, however, achieving the grandiose dreams that the advocates of HST are suggesting (growth, investment, etc.).

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