That does it. Today, I received something like the 500th invite to join some dumbass Facebook group from wannabe concerned citizens attacking British Columbia's initiative to enact the HST. Instead of actually joining such a group, nor joining a group that says "stop fucking bugging me with your misspelled and ignorant pleas," I decided to take time out of my day, yes, time that could be spent doing something actually productive, to read all about the HST in BC, and actually figure out whether it's worth bitching about or not. I admit; my initial bias was in favour of the HST, if only because the documents I saw from the government had actually passed by an editor who wasn't a semi-literate tree-hugging malcontent. That said, I attempted to examine all the evidence as best I could.
If you're not from British Columbia, or Canada at all, or you are
from British Columbia and are an apathetic social mooch, here's the deal, in summary.
In general, if you live somewhere in Canada, you have three government structures above you: a municipal government (your city), a provincial government (Canada is split into ten provinces and three territories
), and our Federal government (one ring to bind them all...). Each of these generally has a corresponding set of taxes that are levied for various services. This debate concerns (as it pertains to the province of British Columbia
, or 'BC') the merging of the BC Provincial Sales Tax (PST)
with Canada's Goods and Services Tax (GST)
to create a new Harmonized Sales Tax (HST)
The idea is premised on a similar transition that the Canadian provinces of Nova Scotia
, New Brunswick
, and Newfoundland
made in 1997, an operation evidently deemed successful by the BC government. Despite the apparent success, it's impossible to simply deduce whether BC's transition will be successful, since each province administers its own version of the PST differently, and, as such, the effects of a transition will be different.
I aimed to discover whether BC's transition plan is actually solid.
I'm not going to go into my research or reading about the Atlantic provinces and their transitions, because, as I state above, it's not terribly relevant. If there's a reference which is relevant, either factually or to support a point below, I'll include a link, but for the most part, let's look just at the facts as they pertain to BC's situation.
Very basically, the current GST rate on applicable goods in Canada is 5%. In BC, the PST rate on applicable goods is 7%. Therefore, the set of goods to which both GST and PST applies in BC is taxed at 12% (each tax is applied to the retail price, and not to the retail price plus one of the taxes). The main argument which makes adopting an HST in BC 'bad', it seems, is that the HST will make the union, or entire set of items, which were previously exempt from PST but not from GST, charge 12% instead of 5% tax.
In short, this is a tax hike.
That said, this is pretty much where the average Joe's cognitive abilities have ended. Time to go out into the streets and riot, you slack-jawed yokels! This level of comprehension negates the full breadth of the situation. No government would levy new taxes at a time when they could do immense harm (has anyone heard of our economic recession? I'm sure Gordon Campbell
has.) just to piss people off. Well, how are they justifying this, then?
The government, in the usual manner governments tend to do, put out a very consistent but enthusiastic website on this issue. You can find it here
. To prevent you from needing to wade through propaganda, I summarize the main motivations they state for the HST (colour commentary provided later):
- the HST will be a value-added tax (VAT)
, rather than the PST, which was a sales tax
. More on this distinction later.
- the government ministry responsible for handling PST collection will be downsized and folded into the Canada Revenue Agency (CRA)
, reducing the 'heavy foot of government', as it were.
- the above bullet means that businesses will only need to remit and keep track of one set of taxes and remittance dates for collected taxes.
- as a result of the transition to a VAT and simplified administration, they expect a lot of savings for businesses, which will translate into job growth.
- in addition to job growth this way, they expect VAT to cut effective marginal tax rates on capital, which should stimulate monetary investment, particularly into industries with high capital purchase requirements.
- as a result of sales tax transitioning to VAT, they expect consumer item prices to go down over time (explained a bit later).
- ... if all that wasn't enough, to offset the increased taxes from formerly PST-exempt items, and riding the lowered administrative cost for the provincial government, there are planned tax cuts, in the form of lowered income tax and tax rebates.
OK, that's the summary. How do they envision this is going to work? First, let's explain the big difference between sales taxes and VAT. A sales tax is one that's applied at the point of sale on an item that's not being resold. What does that mean? It means that if I'm running a hardware store, a hammer, a tool which I purchase and resell to you (the consumer), I can buy without paying a sales tax. Paper on which I print my receipts, however, I have to pay taxes on, since I am the end user of the paper. When I sell you the hammer, I charge you sales tax on it, and remit that to the government. Effectively, this means that I, as a business have to cover the cost of my inputs (in my example, the receipt paper and the hammer) as well as the sales tax paid on my inputs (the sales tax on receipt paper).
In VAT, what I remit to the government is the difference between my input taxes and my output taxes. In the example above, I pay VAT on both, the hammer and the receipt paper. I also charge you, the consumer, VAT on the hammer when you purchase it from my store. However, what I remit to the government is the difference between what I charged you in tax, and what I paid. This means that, assuming that my taxes collected outweigh the taxes I paid, I only have to cover the untaxed cost of my input items
as a business expense.
This has very interesting consequences down a long supply chain. Let's look at a very, very fictional example involving 3 companies:
- a company which sells paper (for receipts, work, etc.)
- a lollipop maker
- a pen manufacturer where the employees eat lollipops
First, a sales tax example. The paper manufacturer sells you paper. Let's assume that $1 of paper is required (for whatever administrative reasons) for the lollipop maker to create a lollipop. Assuming a sales tax rate of 10%, the paper manufacturer will sell it to the lollipop manufacturer for $1.10 ($1 + 10% of $1). Let's assume, for simplicity, that this was the only input cost on lollipops (impossible, I know, but just bear with me). The lollipop manufacturer wants to make a profit of 50% on his lollipops. He paid $1.10 for the raw material for his lollipop, so 50% is $0.55. He thus sells lollipops to the pen manufacturer for $1.82 (($1.10 + $0.55) * 1.1). The pen manufacturer marks up and sells pens to make $0.30 profit per pen. In order for this profit to be there, all of the input costs need to be covered. Suppose that the workers work for free, and one worker makes one pen, and for every pen, he eats one lollipop. Then, the cost of the lollipop is the input cost to make the pen. The pen maker paid $1.82 for the lollipop, so he charges you (the consumer) $2.33 (($1.82 + $0.30) * 1.1) for your pen. At the end of the day, the government gets $0.10 from the paper manufacturer, $0.17 from the lollipop manufacturer, and $0.21 from the pen maker in remitted taxes, for a grand total of $0.48, and you're out $2.33 for your pen. The paper maker made $1, the lollipop manufacturer $0.55, and the pen maker made $0.30.
Now let's look to see if VAT was in place, and the stores had the same motivations. Again, assume a VAT of 10%. The paper manufacturer is still selling his wares for $1 + 10%, or $1.10. The lollipop manufacturer wants to make a 50% profit. He knows that, since he's going to mark up his item, ie. 10% of his cost of sale will be greater than 10% of the cost of his inputs, he can disregard the tax he paid from his 50% profit calculation. Thus, he sells a lollipop for $1.65 (($1 + 50% of $1) * 1.1). The pen maker, wanting to make $0.30 on the sale of their pen to you, knows the same thing, so they charge $1.98 (($1.50 + $0.30) * 1.1), assuming a similar situation as above regarding total input cost of the pen. The end result? You're only out $1.98, saving yourself some money from the previous example. The government gets $0.10 from the paper manufacturer, $0.05 (= $0.15 charged - $0.10 paid) from the lollipop manufacturer, and $0.03 from the pen maker (= $0.18 charged - $0.15 paid), for a total of $0.18. The paper manufacturer made $1 in profit, the lollipop maker made $0.50 (= 50% of his costs, his goal), and the pen maker made $0.30, as they desired. Everybody won, except the government, which got less money than the previous example.
Most importantly, the example above illustrates that you
the whiny consumer claiming they get taxed too much, actually saved money with VAT in place, because manufacturers were able to offer lower prices throughout the supply chain and still meet their profit goals. Let's say that each of our manufacturers wants to make an extra $0.02 in profit. That translates to roughly $0.07 in cost passed on to you, for a grand total of $2.05, which is still cheaper than the sales tax example. However, these companies each now have an extra $0.02 to invest into expanding their operations, and new hires.
That was the long example. Further ones should be shorter. Regarding the folding of the body administering PST into the CRA, well, once you get rid of some office assistants and redundancy in personnel between the CRA and the BC tax collectors, you save salary money. The important part for businesses here is that rather than keeping track of two filing deadlines, and hiring accountants to remit and calculate two sets of figures (GST and PST), only one set needs to be calculated, saving the expense and overhead of administrative calculation. Personally, as part of the management team at EQL Data
, I can tell you that government remittances are no fun, and keeping track of them is a pain. Less time wasted on this overhead means more money which can be spent on hiring people and invested back into the company.
Regarding the argument for HST implying increased investment, in a very long-winded report
the government commissioned on economic growth, the main argument is that the tax cut will help lower the marginal effective tax of capital, which will promote investment. What does this mean? Suppose that I'm a mining company, and I'm thinking of getting investment for a new drill. The investment only makes sense to me if my return on the drill (after I pay the government) is equal to my cost of funds for the drill. Let's suppose here that someone is willing to loan me money at 5% interest. The drill only makes sense if my return on it is 5% of the purchase price. Amongst other things, the report goes on to say, sales tax means that my return must be higher than the VAT case for me to be able to justify the expense. In my example, if my sales tax is 10% (and say this is the only
government cost), then my drill actually has to make me a 5.56% return such that I can justify taking the loan (since 5.56 - (10% of 5.56) = 5). In the case with VAT, assuming that my sales are good, I may be able to completely write off the government cost, so that it makes sense for me to buy the drill even if it only makes me a paltry 5% return on its cost. Modern economics seem to generally
agree that the marginal effective tax of capital is a significant factor for companies when looking to make investments.
Why would anyone think any of this is bad, then?
To that, we turn to the most organized contra-HST site I could find
, and the main one pushed by counter-HST "proponents," if I can call you drooling apes that. For the purposes of objectivity, I will ignore the fact that a video starring Mr. Bill Vander Zalm
adorns the front page of this site, and try to skip to the main arguments the site pushes against HST. Please feel free to email me more (lkosewsk małpa gmail.com). The arguments are:
- a number of goods which were formerly PST-exempt will now incorporate full HST, including (prominently) funeral home services and restaurant meals.
- marginal effective tax on capital is not an effective measure of corporate desire to invest, thus HST will not make a difference in actual business capital investment.
- the HST structure shifts tax burden from businesses (which, as in our example above, don't pay as much tax) to consumers (due to the non-PST exempt items costing extra).
- similar effects to the HST on business could be had by just eliminating the PST on capital investments.
- no public consultation before deciding to implement HST.
- even if the HST helps some businesses, does the help offset the damage done to the restaurant industry as a result of higher food prices?
- HST will cost an 'average' BC household an extra $2100/year.
- the HST removes BC's constitutional right to set and collect provincial sales taxes.
- the Liberal government (in power in BC) promised not to implement the HST.
- BC's economy is struggling, and the extra tax will hurt the economy further.
Hm. That seems like a pretty significant list of complaints. Let's attempt to discuss them all to see their validity.
Of course some services are going up 7% in tax. That was openly admitted. Unless these businesses are already earning less in revenue than they pay in input costs, though, the math we did above demonstrates that, in fact, their prices can be lowered, and their profit margin remain the same. It's difficult to calculate whether or not their prices can be lowered to offset a 7% tax increase right away, because that depends heavily on their supply chain, however, so we can't draw many conclusions there.
One thing we can attempt to work out is whether, assuming no change in consumer habits (which is unreasonable, because you can, in fact, assume consumers won't eat at restaurants so much if the prices are higher - mind you, in Canada, the taxes are not included in the prices listed on a menu, so the effect of the migration away from restaurants is also
rather hard to flat-out predict due to human psychology), if the 7% tax increase in certain goods will actually hurt the BC consumer.
Here are some of the offsetting rebate initiatives planned by the government to counter the increased tax:
- No effective tax increase for hospitals or schools (link
- Gasoline, books, diapers, and residential energy consumption are amongst the new items designated as exempt from the 7% portion of HST (link
- Something I personally find very interesting: under PST, the private resale of used goods was subject to PST (mentioned here
). Despite the fact that this was often overlooked by the government, reselling items (ie. homes) and not paying the government PST was actually tax evasion. For the purposes of more realistic laws, and fairness, HST is not being applied to the sale of used items (link, with regards to home buying
. The link also discusses rebates on purchases of new homes - which are subject to HST)
- Despite the fact that this is probably backpedaling on their part to retroactively justify some tax cuts, they claim that tax credits for low income families (link
) following general income tax reductions and increases in the basic personal amount for BC residents (link
) are related to HST.
Alright, so some of this sounds like retroactive justification and flailing. But certainly, measures like the recently-introduced no HST on residential electricity sound good to me. I guess what I want to say with the above is that the figure of "$2100 increased cost for the average home" is probably just as made-up as the claim that BC's capital stock will somehow jump by $14.4 billion by 2020 because of this initiative. It's hard to say, without accurate income figures and other expenses, whether the raise in tax, balanced by cuts and rebates, will actually impact a person's real salary, particularly if the prices for products go down (and, in a properly fostered competitive environment, it's not impossible for them to do so).
There is more to explore. On the topic of public consultation regarding taxes: I'm glad the government didn't, frankly. Though I am very anti-totalitarian (unless I'm the tyrant in power), the amount of idiot opinions about the economy I hear every day from you flaks leads me to believe that it's very good none of you were consulted about tax structures. Nor do I care about the Liberals' promises not to invoke the HST... if I promised to never drive a car, but then broke my promise one day because you needed a lift to the hospital, you probably wouldn't be bitching much. There are valid reasons to break promises. As John Maynard Keynes put it: "when the facts change I change my mind. What do you do, sir?"
Where was I... marginal effective tax on capital. I personally don't buy the argument that it doesn't help with capital investments, if only because the one author who makes the claim also makes the claim that PST reduction could have been explored
. That's terribly fishy to me, since PST reduction on capital also equals a reduction of marginal effective tax on capital. Are you for or against, friend? I don't know, but your argument here is on very slippery ground. This concept might actually be the very undoing of the whole "restaurants will go out of business if they have to charge 7% extra for food" argument. Consider; all restaurant expenses, from noodles to new chopsticks, fridges, tables, etc., can be written off of their HST in a way that PST never could be. While I don't own a restaurant, and am hard pressed to give you accurate figures into the running of restaurants, my hunch is that this 7% raise could be forgotten if food prices on menus start dropping (again, because tax prices are not included in menus on BC). The psychological effects alone could *increase* restaurant business.
This covers almost all the points I've seen against HST, with the exception of sales tax as a BC constitutional right (which you either care about or you don't, and I happen to sit in the latter camp). It's now 3:48 AM, which means I've spent far too much time sitting around writing this, and it's so long I doubt you'll get to the bottom of it. It has a bottom line though, which is really my plea.
Stop joining stupid anti-tax rhetoric without understanding the full ramifications of what's happening first. Governments don't take the decision to change tax structures lightly. Perhaps there is benefit in this for you after all.