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The Progressive Economics Forum

The HST and Consumer Prices

This morning, Statistics Canada reported that the implementation of Harmonized Sales Tax in Ontario and British Columbia helped drive the national inflation rate from 1.0% in June to 1.8% in July. By comparison, the Bank of Canada’s core inflation rate (which excludes tax changes and volatile items) edged down from 1.7% to 1.6%.

However, annual inflation rates are not the best measure of the HST’s impact on consumers. Statistics Canada also released data on monthly price changes, allowing us to compare June (just before the HST) to July (with the HST).

Between June and July, the national consumer price level rose by 0.5% (0.6% adjusted for seasonality). Consumer prices jumped by 0.9% in Ontario and 1.1% in British Columbia.

Nova Scotia increased its sales tax in July, but the remaining seven provinces comprise a control group. Consumer prices ranged from a decrease of 0.3% in Quebec to an increase of 0.5% in Alberta.

Adding up the seven provinces according to their Consumer Price Index weighting indicates an average price change of 0.0% between June and July. Since average consumer prices were flat in the rest of Canada, the HST appears to be wholly responsible for the 0.9% increase in Ontario and the 1.1% increase in British Columbia.

HST advocates argued that the consumer impact would be mitigated by businesses passing through input tax credits as lower pre-tax prices. For example, TD Economics predicted that the HST would increase consumer prices by only 0.7% in Ontario and British Columbia. But today’s numbers showing larger increases indicate that businesses have not (yet) passed their input tax credits along to consumers.

Implications for Monetary Policy

The Bank of Canada has appropriately promised to ignore one-time tax changes in formulating monetary policy. For the next eleven months, annual inflation rates will be comparing post-HST prices with pre-HST prices.

Therefore, headline inflation rates will be significantly above any underlying trend. These misleadingly high inflation rates should not be used to justify higher interest rates.

UPDATE (August 22): On Friday, I appeared on CBC News Network to discuss this topic. My panel starts 14 minutes into this video. (At 16:40, I felt like something was caught in my throat. Fortunately, I had a glass of water that allowed me to recover.)

Enjoy and share:

Comments

Comment from Tyler
Time: August 20, 2010, 6:57 am

HST impacts will undoubtedly raise costs on existing inventories for goods produced under old tax regimes. Pretty disingenuous to look at the first month of data and conclude (besides the small caveat) that the cost savings will not be passed down.

Also, in BC’s case the carbon tax was also upped in July which had had an effect on consumer prices, a point which is ignored in this post. So no the HST was not “wholly responsible” for the 1.1% jump in BC at least.

Comment from Erin Weir
Time: August 20, 2010, 7:29 am

Good point about the carbon tax increase. It may explain why prices rose more in BC than in Ontario.

I did not “conclude that the cost savings will not be passed down.” But I maintain a healthy skepticism. Even with aggressive pass-through assumptions, consumers are still worse off.

Comment from Tyler
Time: August 20, 2010, 10:44 am

No question consumers are worse off at a 1.1% increase. Although that’s just one side of the ledger. The big selling point of the HST was not the cost savings pass through most everyone recognized that consumers would be facing higher taxes due to repealing existing exemptions.

The real selling point is higher employment in resource extracting communities. That type of analysis can’t be done in a quick and dirty one month lens but is none-the-less the lynchpin of the policy success or failure of the HST. That is, if it lasts long enough to be able to have an effect.

Comment from Erin Weir
Time: August 20, 2010, 11:17 am

I am not sure about BC, but the Ontario government initially tried to deny that there would be any negative effect for consumers.

Most of the capital inputs used in resource industries were already exempt from the PST.

Comment from Ed
Time: August 20, 2010, 10:25 pm

The report also seems to have ignored the personal HST rebate.

Comment from David
Time: August 20, 2010, 11:04 pm

B.C. has been making a similar sales pitch on the HST. But I think one month in is a little bit early to definitively judge the impact of the HST. For many of the capital costs the HST affects, it may take a while for businesses to turn over their capital and experience the savings that are theoretically supposed to be passed onto consumers.

One more thing: I’ve heard anecdotally that some B.C. businesses raised their before-tax prices when the HST was introduced, presumably because people wouldn’t figure it out and blame the price increase on the government rather than the business. So HST may have been an excuse for businesses to introduce “overdue” price increases.

Comment from Travis Fast
Time: August 21, 2010, 9:11 am

David makes a good point with respect to political economy. If businesses know that the average consumer will make the association between a new tax and higher prices and thus blame the government then businesses will pocket the savings and let the government take the heat given it is a one-off change in the price level.

I have often thought that the government mandate that business have to print the percent of the final price which is profit on the receipt.

Comment from David
Time: August 23, 2010, 7:32 am

“I have often thought that the government mandate that business have to print the percent of the final price which is profit on the receipt.”

Fascinating idea, but I don’t think it’d work very well for the following reasons:

1. Most businesses don’t necessarily know what the profit will be. A lot of businesses have significant fixed costs where their profits largely depend on how many customers they have. The profit made on airline tickets, concert tickets and restaurant meals, for example, depends largely on how many people consume their product, so you can’t really tell one person what they’re contributing to the business’s profits.

2. In a lot of cases, it’s the wholesaler’s profits we’re probably interested in, not the retailer’s. Say I run a small independent local gas station who gets supplied by BP. Do people really care about my profits, or do they care more about BP? I’m guessing people are probably more interested in the wholesaler than the retailer in most cases.

3. I’m not sure putting profits on a bill sends the right message to consumers. It may serve to demonize profits, whereas profits themselves aren’t bad — they’re a marker of efficiency in business. It also may send mixed signals; grocery stores may be highly profitable measured in dollars of profits, for example, but they tend to have very slim profit margins. So comparing the percentage of a grocery store sale that goes to profit may not really be a meaningful comparison to the percentage of an airline ticket that goes toward profit.

Comment from Todd
Time: August 24, 2010, 5:11 pm

“It may serve to demonize profits, whereas profits themselves aren’t bad — they’re a marker of efficiency in business.”

Thus a marker of exploitation of business’ workers.

“Demonizing” profits by itself is useless without educating people on how profits are made as well.

Comment from Travis Fast
Time: August 25, 2010, 5:32 am

Nice name!

On point 1.

Fine it could be a targeted profit rate or a rate based on the average of the last three years. It could actually help small business and those in highly competitive sectors because the public would probably be surprised at how low margins actually are. In less competitive, high margin sectors it would could help consumers bargain with sellers. Moreover it could help investors identify high margin sectors and direct investment accordingly.

Indeed, the more I think about it the more I like the idea.

On point 2.

Print both on the final sales reciept.

On point 3.

Is it a good thing to demonize taxes when taxes provide the very basic public goods necessary for consumers and workers to transact with businesses? You know, um, things like roads, street lights, side walks, basic literacy, courts to police contracts, etc., etc., etc.

How does making more information transparent to the consumer demonize anybody?

Todd I think people intuitively know how profits are made. Even orthodox economists intuitively know how profits are made. That is why their welfare analyses start by assuming the initial endowment, or what we might say is by assuming the so-called primitive accumulation.

Comment from Todd
Time: August 25, 2010, 8:47 am

“Todd I think people intuitively know how profits are made.”

This hasn’t been my experience. The times I’ve heard people (non-experts and business types) talking about profit or read threads about it, the vast majority seem to assume simply that profit = revenue – expenses (and that revenue has nothing directly to do with workers, who are seen as an expense).

Comment from Travis Fast
Time: August 25, 2010, 4:35 pm

I think many within the ruling class have a pretty good idea of where their money comes from. How they rationalize that is a different matter: thrift (Smith), abstinence (Clark), risk (Shumpeter), or organization and supervision (Coase, Williamson). My personal favourite is the abstinence justification of profit. But whatever the case they all reveal what they intuitively know when they banter on about the prerogatives of private property. That is they know that the basis of their power is the legally sanctioned social relation between capital and labour.

And true enough from the point of view of capitalists wages and salaries are a cost. But they know if they do not pay the cost they do not get the profits. So from the POV of capital the question is what is the ROI on wages and salaries.

Comment from Todd
Time: August 26, 2010, 6:04 am

“I think many within the ruling class have a pretty good idea of where their money comes from.”

Yes, I agree that they have a better idea (especially the “higher up” they are) than most, but they’re still only crude ideas: the workers have to be there, they have to work (hard), and they can’t be paid overmuch; Smith et al are just icing on the cake (when the bourgeois care about icing).

“That is they know that the basis of their power is the legally sanctioned social relation between capital and labour.”

Yes, but do they they know that, for all their talk about their “paying a fair wage” that, in fact, they don’t and can’t? That it’s the source of their profit?

To paraphrase Doug Henwood, despite their reputation for sophistication, most bourgeois hold to a raw, selfish view of the world.

Comment from David
Time: August 26, 2010, 9:58 am

Hey Travis,

Sorry about stealing your name. My browser usually automatically puts “David” in the Name slot but suddenly decided your name sounded better and I didn’t notice.

As far as putting taxes on the sales receipt, it’s an interesting point. To be honest, I don’t care too much what the tax is, just what the final payment is. On debit receipts, that’s all you see nowadays. But tax is on the receipt for practical reasons; you add up the before-tax prices, then add tax to calculate the total price. You don’t need profits in that calculation.

But you got me on the more-info-is-better front. There’s not too much harm, except perhaps at the margin, wasting more paper from the extra space on every receipt. And from the cost of obtaining and storing all the profit info, especially if retailers need to do that for all the suppliers of products they sell. And perhaps privacy issues; financial info like profits is available for public companies, but is it fair to force smaller private companies to disclose that info to their competitors?

Finally, I haven’t studied Marx in any depth, but I don’t get this “exploitation” of labour thing. Slavery is exploitation because you’re getting people to do stuff against their will. But people voluntarily take jobs and are free to quit if it’s not a good deal. I don’t see how a voluntary agreement where people agree to work for a certain wage can be exploitation.

Comment from Darwin O’Connor
Time: August 26, 2010, 5:36 pm

“But people voluntarily take jobs and are free to quit if it’s not a good deal.”

This is technically true, but there are usually severe consequences to quitting, so in practice it isn’t really true.

Consider this: Why do the “owner” get to control a company just because they provided some of the start up capital, occasionally had a few of the ideas that launched the company or bought the right of control from someone else?

Ostensively it is because the owners are taking the risk, but in most cause they only risking a faction of their money and should the company fail, they’ll have a lot left over from past profits or other investments. For the employees they face the severe consequence mentioned above. Who is really taking the risk?

Comment from Todd
Time: August 27, 2010, 7:34 am

“Slavery is exploitation because you’re getting people to do stuff against their will.”

Exploitation has little to do with will and much more to do with owners (of slaves or capital) not paying people for their work while making money off this set of circumstances.

“But people voluntarily take jobs and are free to quit if it’s not a good deal.”

They’re (sort of) free to go from one exploiting environment to another, not to eschew exploiting environments entirely.

“I don’t see how a voluntary agreement where people agree to work for a certain wage can be exploitation.”

It’s exploitation on two levels: the first, more overt one, is that workers have nothing to fall back on should they have no work/income ie they have nothing to sell but their labour power to get food; owners of capital and land can sell some of that long before they need to go the wall.

The less obvious form is explained nicely here:

http://davidharvey.org/2008/07/marxs-capital-class-05/

The relevant portion (in the audio-only section) is from 53 minutes on.

You can also read it here:

http://www.marxists.org/archive/marx/works/1867-c1/ch07.htm

Search for the phrase “Let us examine the matter more closely.”

Comment from Travis Fast
Time: August 27, 2010, 10:36 am

David,

Yes if you start from exchange relations then the Marxist concept of exploitation is totally meaningless.

If you want to understand what “exploitation” means in Marxian economics (not necessarily agree with, but understand) you will have to do some reading. The wikipedia entries are pretty good. The state of the controversial art is the TSSI interpretation.

There was a healthy debate within and between Marxists and serious neo-classicals and neo-Ricardians on the matter 70s and 80s that subsequently went rancid.

This is not really the place to rehearse the entrenched positions: at best it would end with a corn fight!

Comment from Paul Tulloch
Time: August 27, 2010, 11:04 am

if you want to understand exploitation David, get a job in a fast food restaurant.

Or become a woman, and try and understand why men get a bunch more remuneration than a female doing a similarly rated job- or become a woman and work in a garment factory in an export processing zone, among the over 70,000 zones that dot the less developed economies around the world. (or you could stay as a man and do the last as well- assuming you are not a woman called David.)

Comment from David
Time: August 27, 2010, 10:46 pm

Wow, I didn’t think I’d get that big a response to asking about exploitation. Thanks guys.

I’m not sure where to start. Todd, thanks for pointing me to that reading. I’m not sure I’ve completely understood it, but it seems to me like Marx is describing a situation with a monopoly demander of labour. If there is one capitalist, he can pay the labour less than their “labour power.” But when you have multiple capitalists, presumably the one who pays workers closest to their labour power will attract more workers.

Also, it seems like there’s a general lack of appreciation for owners in your comments and Marx’s passage. Sure, owners don’t do the dirty work that labour does. But they’re the ones providing the jobs. It seems like there’s common agreement that people need jobs for sustenance, and without the owners there wouldn’t be any jobs. If the greedy capitalist can’t make his three shillings because he has to pay the labourers more, then he’s not going to hire any labourers, and people won’t have sustenance.

Comment from Darwin O’Connor
Time: August 28, 2010, 11:14 am

“Sure, owners don’t do the dirty work that labour does. But they’re the ones providing the jobs.”

It’s the customers of the company, who are usually other workers, who are providing the jobs. Owners are just middlemen (middlepersons?).

Comment from Todd
Time: August 28, 2010, 5:38 pm

“If there is one capitalist, he can pay the labour less than their ‘labour power.’ But when you have multiple capitalists, presumably the one who pays workers closest to their labour power will attract more workers.”

Yes, but how is that point relevant? The bourgeois set up a system of “free labour” where wages are theoretically determined by a market for labour, and it’s entirely possible for the market to be in such a position as to make things more favourable for workers. But they’re still exploited. Marx wants to get rid of the exploitation and explains where and how it happens as a step in that direction.

“But they’re the ones providing the jobs.”

How does that justify exploitation? That’s a rationalization after the fact.

“without the owners there wouldn’t be any jobs.”

Do you seriously believe that this is the only way possible for people to work together and get paid for it?

Keep reading and listening at those sites.

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