Thursday, May 13, 2010

I Have a strange Confession

It occurs to me that I may have been the first politician in the history of the B.C. Legislature to have advocated a Harmonized Sales Tax. Way back in 1980, I was in the Universities Model Parliament, and decided I would stump the government ministers by recommending the Value Added Tax. This naturally had them scrambling, since none of them had ever heard of the V.A.T., even though it was already commonly used in Europe.

Should I be ashamed?  Efficiency pays. Harmonization streamlines the administration of the tax, and  is more efficient than a straight sales tax, as it allows businesses to get credit for the tax they pay on inputs (as a deduction off the tax they collect). Exporters can reduce their prices by the amount of the tax they pay in imports that previously would have to be covered in the price. I would probably prefer a  broader tax (i.e. with fewer exemptions) at a lower rate and more targetted help for low-income consumers. But, in principle,
I am not opposed to the HST.

Consider this startling passage from the Mintz Report.  It suggests that 82% of the increase in capital stock  and 80% of the job creation resulting from proposed changes to BC's tax regime will result from sales tax harmonization--i.e. only 18% and 20% from corporate tax cuts.  Thus, if one is really concerned about the equity of shifting tax burdens onto ordinary consumers, I suggest ditching the corporate tax cuts, not the sales tax harmonization.

By 2018, when federal and B.C. corporate tax reductions and sales tax harmonization will be
fully implemented, British Columbia will have a tax regime that is more attractive to capital
than that of either Alberta or Ontario. While corporate tax reductions will have been helpful in
achieving this aim, the largest aid to British Columbia’s tax competitiveness will have been sales tax harmonization (emphasis added). With the elimination of the existing retail sales tax on capital inputs, British Columbia’s effective tax rate on new capital investments will decline by 9.1 percentage points, which will represent almost 60% of the drop in the cost of capital for businesses in British Columbia over the next four years.
By 2020, the combined effect of the corporate tax cuts and sales tax harmonization will be to
increase the capital stock by more than $14 billion, which is expected to translate into an
increase of 141,000 jobs. Sales tax harmonization alone will be responsible for an $11.5 billion
increase in the capital stock and an increase of 113,000 jobs by the end of the coming decade.

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