Ontario’s great HST tax shift
There have been clouds and clouds of smoke generated about the impact of Ontario’s impending introduction of its Harmonized Sales Tax.Â Â Fortunately there is finally now some substance out there in terms of a detailed analysis conducted by Statistics Canada that was recently released by the Ontario NDP.Â And what is shows is quite surprising.
Much of the blame forÂ all the smoke about the impact of the HST lies with the Ontario government which wasn’t transparent about the distributional impacts of the tax when they announced it in their 2009 Budget.Â
This allowed politicians such as Conservative leader Tim Hudak to claim it was a massive tax grab when in fact it will lead to a revenue loss instead (and there’s been some of the anti-tax rhetoric coming from the Ontario NDP as well).Â Progressives who would like to see more government revenue have beenÂ hesitant to criticize it in fears of flaming the fans of anti-tax sentiment.Â Politically, it is also unfortunate that the major promoter of this tax shift of sales tax harmonization and cutting corproate taxes–former Ontario Conservative Finance Minister Jim Flaherty–hasn’t been seen as responsible for this.Â Â
Proponents of theÂ HST such as the ubiquitous corporate tax-cutter Jack Mintz claimed it will create close to 600,000 jobs in ten years, but based on what appears to be fairly simplistic and optimistic analysis.Â This was heavily promoted on the Ministry of Finance’s website, but it is hard to swallow these claims of hundreds of thousands of jobs being created from the investment impact of business tax cuts when it doesn’t seem to have happened with previous business tax cuts.Â Yet still the Ontario governmentÂ didn’t release any information on the distributional impact.Â Â
Last December, Ernie Lightman and Andy Mitchell released a report through the CCPA Not a Tax Grab After AllÂ with estimates from calculations they did using Statistics Canada’s SPSD/M model.Â This reported that most Ontario families would be better off overall as a result of the HST, together with the sales, property tax and personal income tax changes –and that lower income families would be proportionally better off.
This received considerable attention in the press, including a supportive editorial in the Globe and Mail, and was also heavily promoted by the Liberal government.Â However–and unfortunately–the report had some mistakes in a number of its calculations and had to be revised and republished twice.
Since then the Ontario NDP commissioned Statistics Canada to do an analysis of the impact of the HST, also using Statistics Canada SPSD/M model, but they had Statscan do theÂ calculations itself.Â What the results show is that the average family will be $470 worse off on average as a result of the HST and the sales, property and income tax cuts, or worse off by an average $316 if businesses pass through their savings into lowering consumer prices.Â Â Â The assumptions included in this analysis are outlined in the background document.Â Â Overall itÂ appears to be a good and transparent analysis conducted by what should be an accurate and impartial organizationÂ (Statistics Canada).
Those on the very bottom of the income spectrum, making up to $20,000 would be slightly better off on average by about $70, but all those with incomes above this amount would be worse off.Â Â So the tax package would appear to be on balance somewhat progressive in terms of income distribution. Â
However, this and other analyses do not take account of the impact of the corporate tax cuts, which will be worth over $2 billion a year when fully phased -in, which were very clearly part of the Ontario 2009 Budget tax package.Â
I’ve done some calculations of these, using shares of investment income and capital gains by income group, reported by both Statistics Canada and through the CRA tax files and some other sources.Â If we assume that businesses pass on their savings from the HST to consumers through lower prices, I think it is fair to say that reductions in corporate income taxes would flow through to the owners of the businesses.Â If only half of of these benefits flow through toÂ households in Ontario, then the picture is quite different.Â Â Â Â (About 28% of Cdn profits go to Canadian controlled corporations and I assumed that 1/3 of the remaining Ontario profits also flow out to people in other provinces)
Once you take account of the distributional impacts of the corporate tax cuts flowing through, the impact of this tax package is mildly progressive on the bottom end, but regressive in the middle to top end.Â Families with incomes of less than $30,000 are better off by an average of $20 to $80 a year, those in the middle income range from $40,000 to $100,000 are worse off by about 0.5% of their income level (~-$200 to -$400 a year).
However, those with family incomes of over $100,000 would, on average,Â be better off by about $365 a year after accounting for the all elements of the tax package since this group receives a disproprotionately higher level of investment and capital income.
So Ontario’s HST tax reform is not an overall massive tax grab, but it is a major tax shift –and it certainly isn’t all progressive.
Any current discussion about taexleaves out the issue of relying more on a truly progressive income tax over sales taxes, I would like to know if PEF economists would begin advocating tax reform that returns to what seems to me a more fair revenue scheme.
It remains the task of progressives to counter the prevailing message that Canadians generally over taxed. Certainly, corporate and personal income taxes at the very top have been reduced by both provincial and federal governments since the eighties.
I think it is fair to say that reductions in corporate income taxes would flow through to the owners of the businesses.
There’s actually a substantial literature theoretical and empirical – that the benefits of lower corporate taxes flow to workers and consumers.
This tax shift away from corporate taxes towards consumption taxes is exactly what the Nordic countries have implemented.
And there is just as much literature that the benefits of publicly provided goods and services funded by progressive based tax such as personal income taxes are a whole lot better than across the board business taxes. And oh yeah is that the whole trickle down dead as a door nail theory your speaking of?
Consumption taxes are regressive and always will be un-civil, by a simple fact- the marginal utility of a $5 bill to a person making 20K per year and a person making 350K per year is not equal and obtusely disproportionate.
Stephen when are you coming out of your cave? I do have a couple of sticks that might interest you- especially if you rub them fast.
Excellent. Another adherent of the Nigel Tufnel School:
Progressive Person: How do we raise the tax revenues we need for the social programs we want to implement without tanking the economy?
Economist: Consumption taxes. Theory says that consumption taxes such as the GST are the least-disruptive way of generating tax revenue, and available evidence appears to be consistent with the theory.
PP: But consumption taxes are regressive!
E: Yes, but we can correct for that using targeted transfers to low-income households so that they aren’t worse off; that’s what the GST rebate is for. And there will still be lots left over to fund those social programs.
PP: But consumption taxes are regressive!
E: I know. But they introduce fewer distortions than the alternatives, and we can recompense low-income households for their lost buying power.
PP: But consumption taxes are regressive!
E: I’m not disputing that point, but there’s more to the analysis than that. Okay, let me explain the effects of the various forms of taxes…
E: …and so we see that a consumption tax accompanied by direct transfers to low-income households is the most effective way of generating the tax revenues you want.
PP: But consumption taxes are regressive!
I appreciate your participation on this blog and what may be an attempt at debate, but the point of the post is that the compensating tax measures that the Ontario government has introduced haven’t made the overall impact of this tax reform progressive.
It may seem like a nice rhetorical point to use the Nordic example and to play with some platonic dialogue, but the reality is that our governments haven’t made our income tax system progressive in the same way that Nordic countries have. And this tax reform means less money will be available to fund public services, which can be even more progressive.
There may be some literature showing that the benefits of lower corporate taxes flow to consumers and workers, but I don’t think there’s a lot of recent evidence of that (and we’ve already discussed aspects of that at some length in previous post here).
These calculations assume that the business savings through the HST flow through to consumers while the benefits of CIT cuts flow through to the owners of those businesses.
I think that’s a reasonable and balanced assumption. What it shows is that the overall distributional impact of this tax reform package may be progressive at the very end, but it isn’t at the middle to upper income level.
like many other apparent targeted transfers back to lower incomes, results in regressive taxation.
The GST rebate program is far from fair, and in many cases, people do not receive the rebate, i.e. homeless.
If the GSDT was exclusively on luxury items, then fine, not a problem. But with the HST, the consumption tax creep into the main consumption basket of family expenditure is getting further into an across the board consumption tax.
Wait till the smart meters come in- now there is a program only the engineers and right of center economists were invited to the table on. Talk about regressive!
our governments havenâ€™t made our income tax system progressive in the same way that Nordic countries have.
The Nordic countries’ tax systems are not much more progressive than ours (look at Figure 2 from this study). What is special about the Nordics is that they focus their attention of providing transfers to low-income households.
Why the strategy of giving money to poor people is anathema to the Canadian Left is an exercise I leave to the reader. Damned if I can come up with an answer.
Its not a matter of giving money to poor people. It is about taxing the rich. Consumption taxes do not tax the rich- in a way that has any meaning to them.
What is special about the Nordics is actually much more political than strictly economic. Union membership is far higher and laws governing their actions are much more pro-worker than in North America. Due to this and other political factors, issues of progressive taxation are less relevant simply because they keep wage spreads so much smaller–the difference between low wage and high wage is much, much less there.
So, sure, if we were to drastically shrink the spread between low wage workers and executives, such that even low-wage workers had a decent living wage and nobody was taking home megabucks, I’d be a lot less worried about how regressive taxation was. But things aren’t like that here right now, so I’m gonna worry about it.
And just as the key issue in Nordic countries turns out to be political rather than strictly economic, the problem with saying “We’ll just do regressive taxes but then fiddle with transfers after the fact so that the effect is *as if* the taxation was progressive” is that those transfers after the fact will tend to be very politically vulnerable. The two issues are very easy to conceptually decouple. In this political climate, they just won’t happen, or they’ll get clawed back almost immediately.
Also, given the current scale of disparity, I’m not sure you really can have a sufficient tax base with regressive taxation to have the money to genuinely create the effects of progressive taxation.
As to “Thereâ€™s actually a substantial literature theoretical and empirical – that the benefits of lower corporate taxes flow to workers and consumers.” I don’t believe a word of that literature. Over the last fair number of years, we’ve cut and cut and cut corporate taxes, not to mention taxes on investment, and then cut and cut and cut them some more. And guess what? Capital investment in both Canada and the US has freakin’ flatlined. And workers haven’t exactly seen the bleedin’ promised land either.
I’d say there’s a substantial literature making this claim for similar reasons to the substantial literature that claimed financial deregulation was a thing of wonder: It is politically convenient to the wealthy that it be accepted as true. Tell ya what–canvass all the economists known to have predicted the financial meltdown and if the majority of them agree with this substantial literature about how great corporate tax reductions are, I’ll take it seriously.
I was at a NDP meeting where the strategy to reduce child poverty was being discussed. When people questioned why only child poverty was being addressed, rather then all poverty the MPP said that their research indicated that people don’t consider adult poverty something worth worrying about, I guess because people think they did something to deserve it.
Darwin, you have a point about the tendency to discuss poverty exclusively in terms of child poverty. But the quote from Stephen is incorrect. Giving money to poor people is not anathema to the Canadian Left.
The largest item in the last federal NDP platform was a new income-tested child benefit. The Alternative Federal Budget has also consistently proposed measures like doubling the GST credit.
The last bullet point in the NDP backgrounder that you linked to notes that “The assumption and calculations underlying the simulation results were specified by the Ontario NDP and the responsibility for the use and interpretation is entirely that of the authors.”
While some of this is the usual disclaimer of responsibility, it should be noted that Statistics Canada didn’t come up with the assumptions. I would hope that they’d refuse to do the calculations if the assumptions were really out of whack, but I’d like to see the actual report they prepared or at least a more detailed documentation of the assumptions used.
The reason why the CCPA HST report found different results is that their assumptions were different, so it would be neat to see a side by side comparison.
That’s a point that puzzled me and others as well. I think I’ve seen all the assumptions and documentation provided by Statscan as part of this study, but haven’t seen this material from the previous study published by the CCPA.
I believe that the calculations as part of that study were done by the authors on a copy of the model that they own, while in the case of this study the calculations were performed by Statistics Canada. The SPSD/M models may be for different years. The one used for this study is the most recent (version 16.2).
The previous CCPA study excluded those with incomes below $10,000 (footnote 8) while this one didn’t. There may be different economic growth rate assumptions: this one used the PBO forecast; I’m not sure what the previous CCPA study used.
As to â€œThereâ€™s actually a substantial literature theoretical and empirical – that the benefits of lower corporate taxes flow to workers and consumers.â€ I donâ€™t believe a word of that literature.
When Maxime Bernier says that kind of thing about the climate change literature – presumably without reading it – we dismiss it as anti-intellectual posturing.
Over the last fair number of years, weâ€™ve cut and cut and cut corporate taxes, not to mention taxes on investment, and then cut and cut and cut them some more. And guess what? Capital investment in both Canada and the US has freakinâ€™ flatlined.
No, it hasn’t. Investment has grown faster than GDP. Of course, that doesn’t prove anything one way or the other, but it’s important to get your basic facts right.
Well, gosh, Stephen, if there is a sudden global downturn in average temperatures that catches most climate scientists flat-footed, I will start listening to other climate scientists.
But let’s be a little bit straight here: There is an overwhelming consensus among climate scientists, and the few exceptions mostly seem to be fuelled by fossil-fuel industry money. But in economics there are multiple “substantial literatures”, not all of them favour lower corporate taxes, and the “cui bono” issue pushes one to question the pro-corporate-tax-cut line rather than the alternative. The fact that the side favouring corporate tax cuts is also the side that signally failed to predict recent bubbles, downturns and financial fiascos while other schools succeeded is another factor that will tend to prompt one to look at different “substantial literatures”.
Meanwhile, you say “investment”. My claim was about “capital investment”. The two are I think distinct. There’s been plenty of investment in CDOs and other such derivative paper, I wasn’t trying to dispute that. Of course, that doesn’t prove anything one way or the other, but it’s important if you want to refute someone to be talking about the same topic they are.
I was talking about capital investment as well; please to be acquainting yourself with the facts. You have access to a university internet connection – look up the national accounts data on CANSIM.
And the overwhelming consensus in the economics literature is that corporate taxes are pretty much the most destructive way of generating government revenues. I’m not against taxes; I’m against *stupid* taxes. As should be all progressives.
I’m working on a reading list, and I’ll be posting it soon. If you think I’ve missed something, let me know.
C’mon Stephen. You know there is a legitimate disagreement based on your preference to use real capital investment divided by real GDP and what is preferred by many others, nominal investment divided by nominal GDP. There is a great archive of this debate here:
And please, Stephen, please stop the dismissive and disrespectful comments when people disagree with your view of what is correct. I like you having you engage in debate over here, but I’m just short of issuing you a misconduct penalty.
Iglika, a major problem with the Lightman-Mitchell report is that it was not explicit about its assumptions. However, I outlined my understanding of its assumptions in this post.
Unlike the Statistics Canada-NDP analysis, Lightman and Mitchell did not separately examine the distribution of additional sales tax paid by consumers and of revenue forgone through input tax credits. Instead, they just assumed that the net revenue (additional sales tax minus input tax credits) would be distributed on the same base as the GST.