Harmonization’s False Premise

Advocates of harmonizing provincial sales taxes with the federal GST almost always argue from the premise that, whereas the GST only covers consumer purchases, provincial sales taxes apply to all business inputs. Harmonization is then presented as a means of removing the sales tax from business purchases of machinery and equipment to promote new investment.

Not surprisingly, provincial governments have largely achieved this goal by exempting much machinery and equipment from their existing sales taxes. I made this point in the following letter printed in Saturday’s Globe and Mail:

Harmonizing exemptions

Your editorial’s claim that harmonization will provide “billions of dollars in tax savings on machinery, equipment and other expenses” (Sales-Tax Momentum – Aug. 7) overlooks the exemptions that provincial sales taxes already provide for machinery and equipment. The billions saved by business will be on office supplies, construction materials and other inputs currently subject to sales tax in some provinces. While specific tax exemptions for “new investment” make sense, it is doubtful that exempting all business inputs from sales tax is a cost-effective way of promoting investment.

Erin Weir, economist, United Steelworkers

As I highlighted a couple of years ago on this blog, Finance Canada itself notes that the great majority of capital goods purchased by manufacturers are already exempt from provincial sales taxes. So, harmonization is really about removing sales tax from business inputs other than machinery and equipment. These other inputs are generally less consequential to investment decisions.

Nevertheless, one might still argue that we ought to tax business profits instead of business inputs. If so, the removal of sales tax from the remaining business inputs should be combined with a corresponding increase in the corporate income tax rate.

In fact, all of the governments that are harmonizing their sales taxes are also slashing their corporate tax rates. One must conclude that their goal is not to collect a given amount of public revenue more efficiently, but rather to deliver the largest possible tax breaks to business.

2 comments

  • This is simply an increase in a value added tax. Generally this type of tax is regarded ( by the rich) as fairer than increasing corporate or personal income tax. The avoidance rate is much lower than it is with a profit or income tax. The problem is that a consumption tax is always proportionately more difficult for lower wage earners. They get used to it though, and two governments can brag about low income tax rates in the coming elections.

  • In my opinion the push for harmonization is fueled by the fact that some provinces have went ahead with it, resulting in the appearance of a competitive disadvantage. In reality this will shift taxes off all businesses regardless of their profits or market share and onto people regardless of their income or ability to pay. I am of the belief that more public revenues are needed in the currently messy (and sure to get worse) global economy as our ecological loans are now coming into repayment. Thus tax reform is needed, but I think this is nothing more than an disheartening continuation of the poor public policy we are all becoming accustomed to. Increase sales taxes possibly, but shift the burden toward the amazingly profitable, the unnecessarily wealthy and the those engaged in economic activities contributing to our clear environmental, social and cultural decline witnessed in recent years.

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