Three reasons HST is a great idea for B.C. By Elisabeth Gugl and Stephen Hume, Vancouver Sun May 7, 2010 Bill Vander Zalm's movement to take back democracy by repealing the harmonized sales tax is picking up steam. By exploiting the provincial government's fumbling of the HST, the former British Columbia premier has taken a page out of Sarah Palin's populist playbook. His critics say the anti-HST movement is a Trojan horse. Inside the horse aren't Greeks waiting to conquer Troy, but Vander Zalm himself, grinning, waiting to return to electoral politics.
A storm is brewing around the HST. But the HST will be good for B.C. and consumers. The revenue from taxes helps pay for our quality of life and the services we enjoy. But what is it about consumption taxes that people hate so much? Maybe it's because they are reminded of the tax every time they buy something. That's why cutting consumption taxes makes for such good politics, but very bad economics.
The HST combines the five-per-cent federal tax, the goods and services tax, and the seven per cent provincial tax to make a combined 12 per cent tax. The HST applies the same method of tax collection as the GST and taxes the same goods -- with a few exceptions.
Here are three reasons why adopting the HST is a good idea:. If you want a consumption tax, make it a value-added tax like the HST. Both the PST and the HST are taxes that are supposed to tax consumer goods but not business inputs. However, the PST is terrible at making this distinction. The HST would correct this. It accomplishes this by being a value added tax; when a firm sells its product, it charges 12-per-cent tax on the sale price but can claim a credit for the taxes it already paid on the purchases of the materials necessary to produce its product. As such, there is no need to define categories of goods as either consumption goods or business inputs; through the invoice-credit system, the use of a particular product is clearly identified. This way, a restaurant owner purchasing tables and chairs for the restaurant would not pay the tax, but if the restaurant owner purchased the same products to furnish his or her home, he or she would pay the tax.
. The HST will broaden the tax base and lower tax inefficiencies. On average, consumers will be better off under the HST than the PST. The HST streamlines the way B.C. collects its taxes and will save the province and firms money through lower accounting and administrative costs. Second, because the HST taxes consumers on a broader range of goods than the PST and exempts firms from paying taxes on their inputs, goods are produced more efficiently. When in 1991 the federal government replaced the federal sales tax (also known under its original name as the manufacturers' sales tax) with the revenue-neutral GST, gross domestic product gains attributed to the tax reform were estimated to be at least $1.9 billion. Consumers may feel upset because under the HST they would pay a 12-per-cent tax rate on more goods than under the current system of GST/PST. But what they should also consider is that sales prices under the HST and PST would not be the same, because many firms will be able to produce at lower cost under the HST. These savings are passed on to consumers driving down sale prices.
. The HST will boost firms' investment and this will help secure jobs. It's important to take into account the impact the HST will have on the level of production. As firms pay less to produce their products and services, they will invest more in equipment and machinery. University of Toronto economist Michael Smart estimated that annual machinery and equipment investment rose 12.1 per cent above the trend level in the Atlantic provinces when they harmonized their sales taxes with the GST in the 1990s. (Quebec had the HST right from the start when the GST was introduced in 1990; Newfoundland and Labrador, Nova Scotia and New Brunswick harmonized their sales taxes with the GST in 1997). As of July, Ontario also will have an HST, and we are competing with Ontario for jobs.
Will the HST be good for B.C.? It's pretty clear that it will, no matter what your politics.
Elisabeth Gugl and Stephen E. Hume are faculty members in the economics department at the University of Victoria.
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