HST good policy, but up to provinces: finance minister

[canada-man]

HST good policy, but up to provinces: finance minister

James Keller, The Canadian Press

VANCOUVER — Finance Minister Jim Flaherty offered a firm endorsement Sunday of a harmonized sales tax while at the same time distancing his government from a policy that has sparked criticism of provincial governments considering it, particularly in British Columbia.

Flaherty, speaking with reporters in Vancouver, said "there's no question" that combining provincial sales tax with the GST is good fiscal policy -- but he stressed it's not up to Ottawa.

"First of all, the decision to harmonize the GST and PST has to be that of the provincial government," he said.

"I realize that this is challenging for provincial leaders, but I have no doubt in my mind that it's good long-term economic policy for our country."

Flaherty has long said he would prefer the provinces make the switch, and Ottawa is offering some encouragement in the form of billions of dollars in transition funding for governments that sign on.

While supporters argue switching to the HST will save businesses money, critics complain that it would apply to numerous items currently exempt from provincial sales tax, costing consumers more.

British Columbia and Ontario recently announced they would be switching to the HST system, and other provinces are considering doing the same.

The issue has become a headache for B.C. Premier Gordon Campbell, who is facing persistent calls to reconsider the plan, set to take effect next year, and accusations that he hid his intentions during the spring election campaign.

Campbell's government tables a new budget on Tuesday, and he's expected to use the occasion to argue his case for the HST.

The political opposition in Ontario has also seized on the issue, although it hasn't gained the same traction as in B.C.

Saskatchewan, Prince Edward Island and Manitoba are considering adopting the HST, but they have expressed concern about its impact on consumers.

Several Conservative MPs and the Prime Minister's Office have said the federal government had nothing to do with the province's decisions.

Flaherty quickly brushed aside the suggestion that federal Conservatives are trying to avoid political fallout.

"It's not up to us," he said.

But New Democrat MP Libby Davies said the federal Conservatives are trying to hide from public anger.

"I don't think he has any idea that it is now the biggest issue here in B.C. -- people are hopping mad," said Davies, who showed up to Flaherty's media availability to speak with reporters.

"The Conservatives campaigned on this, I find it very curious that the Conservative members of Parliament in B.C. are now running for cover."

Meanwhile, Flaherty used a speech Sunday evening to offer a glowing assessment of his government's handling of the global economic crisis.

Flaherty acknowledged there is still work to be done to ensure Canada recovers from the recession and avoids slipping back into trouble, but he said Canada's response has been a model to the rest of the world.

"We put forward our system as an example for others to follow, while not ignoring the need to make certain improvements here at home," Flaherty told a conference on fiscal policy.

"All countries must take a critical look at their own systems and do what it takes to prevent another financial meltdown. The Canadian system clearly works, and works well."

In a familiar refrain, Flaherty boasted that Canada's banks have avoided the collapses and massive financial bailouts seen elsewhere, and he lauded the Conservative government's stimulus program, including infrastructure spending and tax cuts.

He promised his government isn't finished yet, listing off several changes still to come that he suggested will strengthen Canada's financial footing.

He said the Bank of Canada will be asked to look for ways to implement monetary policy to ensure financial stability, and he said his government continues to work towards a national securities regulator.

"This might be the part of the speech where I say, 'If it ain't broke, don't fix it,"' he said in his speech.

"While we have led the way internationally, our system is not perfect."

Earlier this month, Flaherty said the deficit for the current fiscal year will total $50.2 billion. The federal government plans on running deficits for at least the next four years.

http://www.cp24.com/servlet/an/loca...831_flaherty_recession/20090831/?hub=CP24Home

 

[slowpoke]

So Flaherty is now realizing how necessary it is to remind the voters that HST is up to the provinces. He's absolutely correct - it is entirely up to the provinces whether they buy into Flaherty's hard sell on HST and raise their taxes on thousands of goods and services in the middle of a recession. Shame on those provincial leaders for listening to the federal finance minister! What were they thinking?

 

[train]

The provinces could always lower the provincial sales tax % and then harmonize. Seems simple enough.

Not quite sure what the Feds get out of it. Nothing as far as I can see. perhaps they are believers that it will stimulate exports again because if it works the same as GST the manufacturers get the tax paid on their inputs refunded when they export.

 

[slowpoke]

The provinces could always lower the provincial sales tax % and then harmonize. Seems simple enough.

Not quite sure what the Feds get out of it. Nothing as far as I can see. perhaps they are believers that it will stimulate exports again because if it works the same as GST the manufacturers get the tax paid on their inputs refunded when they export.

The only thing I've managed to understand (maybe) about the whole thing is the reduction in accounting costs because it will become a simpler, single tax that applies to just about everything. I've heard that businesses should save a couple of $billion or so in accounting and reporting costs. Beyond that, I plead ignorance.

I know if the overall tax bite goes up by any significant amount, it will hurt sales of many businesses in Canada. I'd be interested to see examples showing exactly where the benefits are for businesses that previously didn't charge PST on their products or services. I work in one of those industries and I can't see it helping matters unless the PST is reduced to the point where it becomes revenue neutral or a very slight tax increase. But if we start charging 13% instead of 5%, there WILL be blood. Thank God I'll be retired by the time it goes into affect next year.

 

[slowpoke]

The provinces could always lower the provincial sales tax % and then harmonize. Seems simple enough.

Not quite sure what the Feds get out of it. Nothing as far as I can see. perhaps they are believers that it will stimulate exports again because if it works the same as GST the manufacturers get the tax paid on their inputs refunded when they export.

So the 8% PST manufacturers pay on raw materials, equipment & services etc they've purchased in order to turn out products was not being refunded when they exported them? Wouldn't they eventually deduct all those costs anyway when they submit their tax returns? I haven't filled out a tax return in many years so please bear with my almost infinite ignorance on taxation. My accountant thinks its hilarious!

 

[train]

So the 8% PST manufacturers pay on raw materials, equipment & services etc they've purchased in order to turn out products was not being refunded when they exported them? Wouldn't they eventually deduct all those costs anyway when they submit their tax returns? I haven't filled out a tax return in many years so please bear with my almost infinite ignorance on taxation. My accountant thinks its hilarious!

If you buy $100 of some taxable goods you would pay $8 bucks. To keep the example simple say you sell your product for $150 after putting labour and other cost into it of $20. Your profit is $22. Your tax is 34% of that or $7.48. Net Profit after tax is $14.52

If it's harmonized and you export you get the $8 back when you export so your profit is now $30 and net profit after tax is $19.80.

You gain, net, is $5.28 ($19.80 - $14.52) which is 66% ( 100% - 34%) of the $8.

That's if it works the same way as GST does. So it's a stimulus to exporters of some significance I guess. I guess the feds do gain because the Federal portion of the corporate income tax increases slightly - in the above example by somewhere around $1.60.

 

[someone]

The main economic benefit of harmonization is that by boarding the tax base, it creates fewer distortions in relative prices and hence reduces the deadweight losses from the taxes (for a given revenue level, which depends on the rate they decide to harmonize at). In general, the broader the tax base, the better it is from the viewpoint of economic efficiency. In addition, administrative costs would go down. The question of exports is a bit move complicated as in the long run exports have to equal imports, but otherwise Train’s basic logic is right.

 

[danmand]

The main economic benefit of harmonization is that by boarding the tax base, it creates fewer distortions in relative prices and hence reduces the deadweight losses from the taxes (for a given revenue level, which depends on the rate they decide to harmonize at). In general, the broader the tax base, the better it is from the viewpoint of economic efficiency. In addition, administrative costs would go down. The question of exports is a bit move complicated as in the long run exports have to equal imports, but otherwise Train’s basic logic is right.

Even more savings could be realized, if Canada as most other countries would go to a
system where all taxes are included in listed prices, i.e. the price you see is the price you pay.

 

[slowpoke]

If you buy $100 of some taxable goods you would pay $8 bucks. To keep the example simple say you sell your product for $150 after putting labour and other cost into it of $20. Your profit is $22. Your tax is 34% of that or $7.48. Net Profit after tax is $14.52

If it's harmonized and you export you get the $8 back when you export so your profit is now $30 and net profit after tax is $19.80.

You gain, net, is $5.28 ($19.80 - $14.52) which is 66% ( 100% - 34%) of the $8.

That's if it works the same way as GST does. So it's a stimulus to exporters of some significance I guess. I guess the feds do gain because the Federal portion of the corporate income tax increases slightly - in the above example by somewhere around $1.60.

Thanks for the explanation. I'm sure in a very competitive marketplace, exporters would love to have that extra $5.28 to play with. And lots of other businesses will be happy to save on accounting and reporting etc. And if ON lowers the PST to, say, 5%, it will also benefit lots of non-exporting companies as long as their products were already PST taxable.

Using your first scenario:

materials = $100, PST = $5, labour etc = $20 so total cost is $125
selling for $150 gives you $25 less 34% = $16.50 instead of $14.52 so you've picked up an extra $1.98 (13.6%) in after tax profit.

So far so good - but he interesting part will be how ON goes about compensating companies like ours that never charged PST on their goods & services. Even if ON cuts the PST in half (to 4%), we'll still be taking the brunt of this. Our customers would go from 5% to around 9% so McGuinty will soon be facing angry villagers waving torches and pitchforks unless he can devise a phasing-in formula or downsteam tax credits that refund a large part of the extra taxes paid. It will be complicated so you can bet they'll fuck it up for some industries.

 

[someone]

Even more savings could be realized, if Canada as most other countries would go to a
system where all taxes are included in listed prices, i.e. the price you see is the price you pay.

I am not sure about this. In terms of cost to the seller, I can’t see a great difference between a computer working out the tax when you pay versus before you pay. It would save a bit of mental work for the customer but I am not sure that is a good thing as people would quickly forget what is taxed and what is not and hence become less informed. I remember the days when Canada had the old Manufacture sales tax. There was usually very little fuss when the government raised the tax. I think that was largely because most people had no idea what it applied to and hence had no idea of when they were paying it.

BTW, as things stand, I think it is entirely up to the seller whether to include the tax in prices. I am not even sure how the government could enforce a law telling sellers not to state a before-tax price. However, even it it is possible, I don't think it would be a good idea for reasons stated above.

 

[danmand]

I am not sure about this. In terms of cost to the seller, I can’t see a great difference between a computer working out the tax when you pay versus before you pay. It would save a bit of mental work for the customer but I am not sure that is a good thing as people would quickly forget what is taxed and what is not and hence become less informed. I remember the days when Canada had the old Manufacture sales tax. There was usually very little fuss when the government raised the tax. I think that was largely because most people had no idea what it applied to and hence had no idea of when they were paying it.

BTW, as things stand, I think it is entirely up to the seller whether to include the tax in prices. I am not even sure how the government could enforce a law telling sellers not to state a before-tax price. However, even it it is possible, I don't think it would be a good idea for reasons stated above.

Most other countries have laws that require sales and vat taxes to be included in the listed price. I can only think of the US and Canada not doing this, but there may be many more.

Your argument against including the taxes in the listed prices is an ideological one, not
one of efficiency. Clearly there would be savings, if all invoices and sales slips did not
need to have 4 lines instead of 1. By the way, I find your argument that people will forget
that there are sales and VAT taxes a bit insulting to the voters.

 

[someone]

Most other countries have laws that require sales and vat taxes to be included in the listed price. I can only think of the US and Canada not doing this, but there may be many more.

Are they laws that firms have to hid the taxes or are they just standard business practices?

Your argument against including the taxes in the listed prices is an ideological one, not
one of efficiency. Clearly there would be savings, if all invoices and sales slips did not
need to have 4 lines instead of 1.

If that was a big cost, I think firms would already have done it. After all, there is nothing keeping them from doing it now.

By the way, I find your argument that people will forget
that there are sales and VAT taxes a bit insulting to the voters.

I definitely don’t think voters are well informed of just about any issue. However, in this case, I think it is understandable. I freely admit that when we had the hidden manufacturer’s sales tax, I only had a broad idea as to what was included (many but not all manufactured goods). I am sure that if you did a poll of countries where the tax is hidden, you would also find that people only had a broad idea of what is included. It would likely be a better idea than Canadians would have. Most of them include all food (as they should) so they would not have the problem of some items they buy from the grocery store being taxed and other not being taxed. However, even taking this into account. I suspect they would not know the exceptions well. In Canada, things would be worse, given our exemptions.

 

[danmand]

Are they laws that firms have to hid the taxes or are they just standard business practices?

I know it is the law in Denmark. Retail stores are generally much tighter regulated in Europe than here, so I would expect the same kind of law in germany etc.

Was there not recently a movement and a "law" put in place to force airlines to include
all surcharges in the listed prices?

I just have to express my belief that preventing VAT taxes from being included in prices is
a weak defense against socialism and communism. There are more important issues with
communism.

 

[someone]

Was there not recently a movement and a "law" put in place to force airlines to include
all surcharges in the listed prices?

I think that what is really annoying about airline prices is that they list normal costs of doing business (e.g. fuel) as separate surcharges.

I just have to express my belief that preventing VAT taxes from being included in prices is
a weak defense against socialism and communism. There are more important issues with
communism.

I have no idea where this is coming from. Did the old Soviet Union hid VATs? I am surprised they even bothered with consumption taxes at the retail level. However, I will take your word on this.

 

[danmand]

I have no idea where this is coming from. Did the old Soviet Union hid VATs? I am surprised they even bothered with consumption taxes at the retail level. However, I will take your word on this.

I was merely expressing that God help us if the only thing that stands between us and communism
is the inclusion in prices of the VAT.

 

[train]

Wonder what the provincial Liberals will do if the federal Liberals come out against harmonizing in the pending election ?

 

[slowpoke]

Wonder what the provincial Liberals will do if the federal Liberals come out against harmonizing in the pending election ?

If McGuinty is really sold on it, he'll probably try to negotiate the same deal with the new gov't that he'd arranged with the CPOC. The feds benefit too so I can't see them refusing. If Iggy becomes our PM, (a rather large "IF") and he steadfastly refuses to honour the CPOC deal, I think McGuinty could still go ahead and harmonize anyway. It is a provincial decision and I don't think it would require permission from Ottawa.

 

[train]

You are probably right but Iggy may not be able to resist the opportunity to score some points , which puts McSquint in a bit of an embarrassing position.

 

[slowpoke]

You are probably right but Iggy may not be able to resist the opportunity to score some points , which puts McSquint in a bit of an embarrassing position.

From a political standpoint, Iggy needs to come out against this. It may be of some benefit - as we discussed earlier in this thread - but it involves too much math and it contains extra taxes so it will be a hard sell. I think Flaherty was politically reckless to roll it out to the provinces when the economy was so weak and his gov't had only a precarious minority. Now the whole HST story has Flaherty's picture on the cover and the Libs can exploit the "CPOC-sponsored tax grab when our economy is so fragile". It's easier to attack this one than it is to defend it. Iggy may also propose "HST lite" or promise to leave the door open for the future when our economy is back on track. That's what I would do if I was in Iggy's shoes.

 

[train]

From a political standpoint, Iggy needs to come out against this. It may be of some benefit - as we discussed earlier in this thread - but it involves too much math and it contains extra taxes so it will be a hard sell. I think Flaherty was politically reckless to roll it out to the provinces when the economy was so weak and his gov't had only a precarious minority. Now the whole HST story has Flaherty's picture on the cover and the Libs can exploit the "CPOC-sponsored tax grab when our economy is so fragile". It's easier to attack this one than it is to defend it. Iggy may also propose "HST lite" or promise to leave the door open for the future when our economy is back on track. That's what I would do if I was in Iggy's shoes.

Let's see. I think McSquint is uneasy right now.