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The Progressive Economics Forum

Will the HST boost job growth and over what timeframe?

As BC and Ontario have now started paying the HST at the till, many people may be wondering when exactly can we expect to see those jobs postings opening up.

This is a good question. According to analysis commissioned by the BC government from economist Jack Mintz, titled British Columbia’s Harmonized Sales Tax: A Giant Leap in the province’s Competitiveness, the shift to HST will bring in 113,000 new jobs by 2010. A similar report by Jack Mintz for Ontaro in November 2009, though with the less grandiose title of Ontario’s bold move to create jobs and growth, estimates that Ontario will see 591,000 new jobs over the next 10 years as a result of harmonization and corporate income tax cuts.

These are large numbers, but let’s not forget that these are only estimates and should be treated as such. How reliable are these estimate? Not very.

They’re based on a simple economic model and are inconsistent with estimates produced by the same economist, Jack Mintz, in a Sept. 2008 CD Howe Commentary piece co-authored with Peter Dungan, Finn Poschmann and Thomas Wilson.

In that paper, Mintz and his co-authors used a different model and estimated that Ontario would see temporary job loss for a number of years after harmonization, and a much smaller employment gain (only 5,900) 10 years after harmonization with a provincial rate of 8%.

Contrast this with the November 2009 Ontario HST paper by Jack Mintz (using the same methodology as the 2010 BC HST report), which makes no mention of temporary job loss and projects job growth which is 100 times larger at the 10-year mark (591,000 new jobs). This seems like a very large discrepancy in the outcomes of the two models, so I emailed Professor Mintz asking for an explanation. Here’s his response:

You are right that two different resutls come out although the exercises were quite different.

The first paper on Ontario with Tom Wilson and Peter Duggan was based on a sales tax reform only with no other tax changes.  At 8 percent, the change was almost revenue-neutral — long run impacts would take time due to capital adjusting slowly.  It was also a fixed price macromodel with taxes only affecting the user cost of capital outside of demand effects.  Short-term employment effects were analyzed.

What I did in the second paper was a simple general disequilibrium model with unemployment but modeling both sales tax harmonization and cuts to corporate income tax rates (tax reductions offset the impact of sales taxes on real wages).  The estimate on job creation is based on long run impact over ten years.

Professor Mintz’s explanation shows that the two results aren’t actually contradictory – both papers find positive employment effects at the 10 year mark (which could be considered long-term), and the most recent paper does not make any pronouncements on the dynamics of getting to that employment growth (so it’s compatible with an initial decline followed by strong job growth towards the end of the 10-year period).

What I’m concerned about is the vastly different magnitude of the employment growth results at the 10 year mark in the two papers. The fixed price macromodel Mintz used in the 2008 paper shows employment gain of 5,900 jobs at the 10 year mark, which is almost negligible given the size of the labour force (0.08% increase in employment according to Table A-2). The general disequilibrium model, on the other hand, produces a number that’s 100 times larger – 591,000. I’m not sure if this includes the effect of the other tax changes, but in the BC paper this same disequilibrium model shows that about 80% of the job growth comes as a result of the HST (113,000) while corporate tax cuts have a smaller effect on jobs (28,000 for a total of 141,000 new jobs). If Ontario’s anything like BC, this would still translate into much larger HST-driven employment growth in the general disequilibrium model than in the fixed price macromodel.

It seems to me that the magnitude of the employment effect of HST is not robust. Given that there are no empirical studies on the employment effects of harmonization in Canada, I conclude that the argument that this tax reform will be a boon for job creation is a bit of a stretch and should not be used as a major selling point of the tax.

As an economist, I agree that value-added taxation is an improvement over the current retail sales tax system used in both BC and Ontario, but it seems to me that many of the projected economic benefits of switching to HST are overestimated, especially those that relate to employment and real wage growth.

Further, the findings of Mintz’s fixed price macromodel exercise show that harmonization increases the level of business investment, which leads to GDP growth, but that this GDP growth is not accompanied by substantial (in terms of magnitude) increases in employment or real wages for workers; it seems to accrue almost entirely to capital rather than labour.

This should make us all really concerned about the distributional considerations arising from sales tax harmonization given Canada’s recent rising levels of income inequality and the real wage stagnation.

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Comments

Comment from Dan S
Time: July 6, 2010, 7:41 am

As a non-economist, I am totally miffed how government (and economists) can spin taxes as a good thing. If you really want to see job growth and new capital investment, get rid of all the HST altogther. And get rid of McGuinty and his gang in the next Ontario election.

Comment from Erin Weir
Time: July 6, 2010, 7:57 am

The Ontario government has been repeating the “600,000 jobs” claim ad nauseam. As I noted back in November, Mintz’s report was nothing but an attempt to concoct a big number for political use. It’s unfortunate that the BC government is running the same scam, but good that Iglika is questioning it.

Comment from MoS
Time: July 6, 2010, 9:13 am

I think it’s a bit tenuous in today’s world to equate increased corporate profits with a commensurate increase in hiring. Surely we’ve seen enough of America’s “jobless recovery” to throw these facile assumptions into the “doubtful” bucket. Besides don’t these studies assume a relatively stable economy of the sort we enjoyed in the post-war decades. I think we’re living that world behind in light of all the challenges befalling modern society, enough at least that the HST impacts will be hard to separate out ten years from now.

Comment from Toby Sanger
Time: July 6, 2010, 9:25 am

Good post, Iglika. Mintz’s calculations of job creation from the HST, which have been used by him and others without qualification, appear to be highly simplistic.

As far as I can tell (he doesn’t display the calculations) he’s simply taken a department of finance CGE study that showed a 7% increase in investment from a 10% reduction in the cost of capital and applied this to BC.

So the 13.97% reduction in the cost of capital from the HST and CIT cuts then leads to 9.8% increase in capital stock. This is then used to get the jobs created (using a constant share production function).

Furthermore, assuming that the increase all flows through to increased employment, without wage increases, seems to be at odds with the results of the studies he cites on the previous page, which suggest wage increases from cuts in corporate tax rates. This is extremely shallow, barely back-of-the-envelope stuff, based on some very questionable assumptions.

Comment from Purple Library Guy
Time: July 6, 2010, 10:08 pm

As to the distributional issues–well, of course. What would be the point of spending lots of effort and political capital selling an unpopular tax if it weren’t going to give more money to the rich? When was the last time any Conservative or Liberal government made any kind of change in its revenue sources or spending that wasn’t intended to skew distribution upwards?

Comment from Trevor Tombe
Time: July 9, 2010, 11:44 am

I agree that the employment effects is an interesting question. Not one that would change my view of the tax one wY or another. I thought I’d point out an empirical piece by Michael smart here at Toronto,

http://homes.chass.utoronto.ca/~msmart/wp/hstimpacts2.pdf

Not the employment effects… But, if labour and capital are complementary then this piece is very suggestive of a positive impact on employment.

Comment from Nick Rowe
Time: July 9, 2010, 2:30 pm

Iglika: I was really surprised (stunned!) on reading your post. Not at your post (which is very reasonable), but at the realisation that the HST was being advocated on the grounds that it would create job!

Not my area, but the HST sounds good to me, but NOT because it will create jobs. It’s got nothing to do with jobs. Did a post on this:

http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/07/hst-and-jobs-more-studies-in-applied-orthogonality.html

Here’s my guess: It’s a “fixed price” model. Suppose you hold the real wage fixed, and let emplyment be demand-determined. That’s equivalent to assuming a perfectly elastic labour supply curve. Now, suppose the model also has a very elastic labour demand curve. (It would be very elastic, if you have perfect capital mobility, a small role for fixed natural resources like land, and constant returns to scale technology). Then a tiny cut in the effective tax rate on labour (which the HST probably does) would cause a very large increase in employment. Make that labour demand curve perfectly elastic (say, assume away natural resources altogether, for example, or just import them) and a tiny labour subsidy would create an infinite number of jobs!

But this certainly wouldn’t mean that the tiny labour subsidy (or HST) would be an infinitely good thing.

Comment from Bruce McAra
Time: July 10, 2010, 9:35 am

Rather than examine the methodology of the Mintz report simply look at the gross numbers. In BC the PST savings are about $2 billion – $1.4 after tax. Mintz says business will reinvest $1.1 in capital spending, create 113,000 jobs at $51K each – that’s $5.8 billion a year not including benefits and other costs of having people around. On top of that we are to assume that prices will be reduced.

If there were business investments that would generate the returns to support those numbers then the paltry savings of PST would not be required to stimulate investment. Investors would be running to the BC gold rush.

The last time we saw economic multipliers like these it involved loaves and fishes.

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