September 3, 2010
Economic Snapshot
Compared to retail sales tax, HST definitely the better tax
JOHN CLINKARD
consulting economist, CanaData
It seems that the consensus view regarding the recently introduced harmonized sales tax in British Columbia and Ontario has been negative, primarily on account of the perception that the HST is a tax grab that also increases new house prices.
These criticisms have been exaggerated, however, and they overlook the fact that the new harmonized tax is more efficient than the old provincial sales tax because it will tax consumption rather than production.
This is a desirable shifting of the tax burden, since taxes on the production of goods and services tend to have a higher social cost in the form of reduced savings, less investment and lower productivity growth than do taxes on consumption.
Recent studies by two conservative think tanks, the Fraser Institute in B.C. and the C.D. Howe Institute, attempt to dispel some of the misunderstandings related to the HST as it applies in B.C. and Ontario.
First, in both provinces, higher tax revenues under the HST will be offset by cuts to personal income taxes in order to make the new tax revenue-neutral.
Second, although prices of previously untaxed services in the two provinces will increase in the short term, businesses will – as they did when a harmonized sales tax was introduced in Newfoundland and Labrador, New Brunswick and Nova Scotia in 1997 – pass cost savings on to consumers through lower prices.
Third, since the HST effectively eliminates the retail sales tax and its associated compliance costs, it will significantly reduce firms’ compliance costs and also cut government tax administration and collection costs.
Fourth, although the HST will put a new tax on certain businesses – specifically the hospitality and food services industry, as well as the personal services industry – it will distribute the burden of taxation more equitably across a broader range of goods and services, therebyreducing the sectors which get a tax break.
Clearly the vast majority of taxpayers prefer less tax to more. However, with the HST helping to stimulate savings and investment and thus underpinning economic growth, there are compelling reasons to expect it will have significant advantages over the retail sales tax it is replacing.
John Clinkard has over 30 years’ experience as an economist in international, national and regional research and analysis with leading financial institutions and media outlets in Canada.
Data sources: CD Howe Institute, Statistics Canada/Chart: Reed Construction Data – CanaData.
