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The original title that I suggested for this was "mindnumbingly boring post." I thought these might be of use to any of you out there who teach or do tax policy.

I claim the traditional editor's privilege to provide titles.

Of course, I'm not very good at it...

Why would the incentive to evade the HST be any different from the incentive to evade the RST is replaced? In fact, if you assumed that the deadweight loss triangle from tax evasion is similar to the deadweight triangle from tax avoidance, couldn't you argue that spreading the tax over services as well as goods might reduce total evasion? (I'm not sure if my theory is correct here in drawing that analogy between evasion and avoidance loss triangles. )

Passing the savings on to consumers I think you could consider to be an empirical question. There have been a couple of studies in CPP that look at this in the context of the Atlantic province early adopters of the HST. Any comment on those?

There was no RST on things getting a carpenter to come and build a new porch, hence the lack of incentive to evade RST on home renovations! I think the argument is the old RST applied to things like purchases of computers or cars where evasion is more difficulty because these are well documented transactions e.g. if you buy a car you have to get a whole bunch of paperwork.

This argument is also being put forward by representatives of the constructions industry.

Jim, you're right, there's a good article in Canadian Public Policy in 2000 that looks at the price changes in Atlantic Canada when the HST was introduced. I was really pleased to see that their findings were consistent with my hypotheticals above - household operations and furniture was one of the CPI categories that decreased most in price, whereas personal care (haircuts) went up. What I don't know is how much "hidden tax" was removed with the switch to the HST in Atlantic Canada, so have no idea what percentage of the tax savings were passed onto consumers.

Interestingly, that CPP article is quite negative on the equity impacts of the HST, because of the increase in taxes on a lot of basic necessities.

"Interestingly, that CPP article is quite negative on the equity impacts of the HST, because of the increase in taxes on a lot of basic necessities. "

First stop, HST, second stop PGVST (Pigovian Sales Tax) where the government appoints a board of economic experts to adjust the tax weighting of every item to reflect externalities (presumably this would lead to light/no taxation on necessities since they have the positive externalities that come from keeping people alive and avoid the negative positional externalities that plague most other goods), subject to the condition that the total weighted rate of taxation must remain (as much as possible) unchanged.

Interesting post.

My suggestion for a title: Get off the couch, and get ready for a haircut

I hadn't followed the details of the HST (and I hate those supply and demand graphs in general - these are nice however with some colour) but I hadn't thought about the double taxation aspect of RST on manufactured goods. So, that was informative, thx.

I can recall when Mulroney introduced the GST, initially it was rumoured to come in at 9%, but got whittled back to 7 (perhaps for political reasons). Now it's down to 5, which perhaps makes the HST introduction/increases (NS) more palatable politically, in the short term.

Q: O/T but related, I often hear or see economists argue that consumption taxes are better than income taxes because the reduced income tax leads to more personal saving (and less consumption). I've never fully understood this argument. Are there some studies that have demonstrated this to be the case? Perhaps a separate blog posting for someone if the reply can't be easily answered here.

"the basic point is that the bulk of the HST could potentially fall on the owners of undeveloped real estate, not new homebuyers"

could you expand on this? thx

JVFM - I'll answer in tax professor mode (you might want to go and read about Lloyd George and Avatars instead). People often confuse the way a tax is implemented and what the tax taxes. There's two ways of taxing consumption. One is with a tax like the GST/HST that taxes people when they spend money. There's problems with the GST/HST approach. Because everyone pays the same tax rate when they buy something, it's not very progressive.

Another way of taxing consumption is to allow people to make unlimited RRSP (registered retirement savings plan) contributions and tax any RRSP withdrawals (or unlimited tax free savings account/Roth IRA contributions). With unlimited RRSP contributions, what you're taxing is income-savings+dissavings. Since income-savings=consumption,that's a consumption tax too.

Does it make sense to you that having unlimited RRSP contributions would make people save more? If so, then you understand the argument for consumption taxes.

There's a huge number of studies on whether or not having things like RRSPs makes a difference to whether or not people save. I'm going to try to hyperlink a short summary by Burbridge, Fretz and Veall in Canadian Public Policy. My sense of the literature is that a large chunk of the Canadian population hardly saves anything at all (except for buying a home or - for the lucky minority - having an employer pension)so most of the action in terms of aggregate savings is in terms of what happens in the housing/mortgage market, government debt/savings, and the savings of the very fortunate minority who own most of the assets.

My own personal view is that doing things like changing default options on employer-sponsored RRSPs (you're in unless you opt out, rather than the other way around), and taking a hard look at credit card regulation (someone on WCI - Declan? - pointed me to a great study showing how the minimum payments on credit card statements actually *decrease* the amount that people pay on credit cards on average) would probably make more difference to savings behaviour than most other policy options.

I've wondered about whether or not the reduction of the GST to 5% was part of some brilliant and overlooked master scheme to harmonize federal and provincial sales. Any political insiders know?

[edited to fix link - SG]

On the question of tax savings being passed on, there was another CPP article in 2009 that I think looked at this more specifically, on a sector by sector basis.

The article Jim mentions is by Smart and Bird. The findings in terms of the patterns of price changes are similar to the earlier article. It found basically that the tax savings from switching from RTS in industries like furniture were passed onto consumers, but also that added costs, e.g. for shelter, some categories of footwear and clothing, were passed on also. They conclude that the increased prices for low-cost footwear, children's clothing made the switch from RST to HST somewhat regressive (it increased taxes relative to income more for low income people) - but I don't think they calculated how much refundable credits counter-acted the higher taxes. You can read it here.

[edited to fix link - SG]

Does it make sense to you that having unlimited RRSP contributions would make people save more? If so, then you understand the argument for consumption taxes.

Thanks for the explanation. This would make sense to me if a significant number of people were maxing out on their limited RRSP limits as it sits. Are they? And if not, couldn't the same outcome be accomplished through better education/marketing?

So, to see if I have this right, the policy initiative is to get people to put more money into RRSPs, and the way to encourage that is by making more money available after income tax. Raising GST/HST rates compensates for lost gov't income from lower income tax, and the fact that more money will be socked away into RRSPs. Is that the basic idea?

I may have more questions depending upon any responses. Thx


I'm not sure about the B.C. situation, but here in Ontario, your example with the furniture maker would be wrong. Under PST, the manufacturer would not pay PST on items incorporated in the furniture. He is allowed to give his suppliers a purchase exemption certificate for those. The same is true of equipment used directly in production. There is no double taxation on these items.

Certain things are subject to tax. For example, vehicles, office supplies, and telecommunications. So those inputs are, effectively, double taxed in the way you suggest.

I wrote something on the PST-HST change for the local paper. It's available at http://www.andwhyisthat.ca/ if you're interested.

I checked the B.C. situation. It's much the same. Here is a quote from the B.C. Ministry of Finance Tax Bulletin for manufacturers:

"Materials Incorporated into a Finished Product

You do not pay PST when you purchase goods that will be processed, fabricated, or manufactured into, attached to, or incorporated into other goods for resale or lease. To purchase the above items without paying PST, give the supplier your PST registration number. If you do not have a PST registration number and you qualify, give the supplier a completed Certification of Exemption form (FIN 453)."

One thing that intrigues me about moving to the HST in Ontario is the possibility of benefits in the form of tax savings being passed out of province (hopefully here to PEI). Any thoughts on that?

Jim, I don't expect there will be much difference. Businesses in general are going to save a bit, but manufacturing is one of the least affected because so many of its inputs are already tax-free.

One area where you might see some benefit is telecommunications. Those companies will get significant savings in Ontario, and I expect some small part of that will get passed on to you someday.

Paul, I'm prettty sure you're right. The Ontario government website gives an example very similar to the one I give, except with a clothing manufacturer - it shows "hidden taxes" on supplies, office supplies, furniture, forklifts, shelving, signs etc all being incorporated into the price of a suit:
tax cascading example. Although it says "raw materials" are taxed and has a picture of some yarn, reading more closely Jack Mintz's analysis of the 2009 Ontario budget it seems that most of the tax cascading is coming from transportation and equipment and machinery purchases. Mintz, like you, figures that communications is one of the sectors that will benefit from the changes announced in the 2009 Ontario budget: "the METR on small business investment will decline precipitously from 28.6% in 2009 to 13.3% in 2010, especially in construction (43.8% to 15.5%) and communications (47.8% to 14.9%)." B.t.w., I like your article Paul and agree with most of what you say. The post above is basically the solutions for my ECON 3405 assignment, which was "find a newspaper article about the HST and analyze it." I wish someone had found your article! The best article of the ones that they did was one by Andrew Coyne in MacLeans.

Jim, if people in PEI buy goods manufactured in Ontario, presumably there would be some tax savings. I don't know if anyone's thought about it.

Just Visiting - I wasn't thinking of anything as complicated as you're thinking. The GST and HST promote savings because if you don't spend money you don't get taxed, so people don't spend money in order to avoid paying tax. And not spending is the same as saving. The RRSP thing is just an analogy - just like putting money into an RRSP avoids income taxes, keeping your money in your wallet avoids GST/HST. So if RRSPs increase saving, GST/HST should increase saving for the same reason.

Hmmm, I may be back to square one on my understanding then. Assume a revenue neutral tax shift from Income Tax to HST.

Say I make $200, and the marginal tax rate is 25%. So, my take home pay is $150. I spend $100 on goods, pay 15% HST and save $35.

Now, marginal tax rates are reduced to 20%. My take home pay is now $160. I spend $100 on goods, and now pay 25% HST and save $35.

My wallet sees no difference at the end of the week. So, I'm not saving anymore than before. Unless I have some Pavlovian response to HST above 15%, I'll still salivate and buy the same goods.

How about a Pavolian response to your take home pay increasing?

Sorry, Pavlovian. (I was salivating at the thought)

Which will make me...save more? Well maybe. This is Canada afterall...

Just Visiting: Here is an old-ish post on why the GST is a good idea. The basic point is that the GST does not reduce the rates of return on investment - and higher rates of return generate more savings.

Just visiting - "Say I make $200, and the marginal tax rate is 25%. So, my take home pay is $150. I spend $100 on goods, pay 15% HST and save $35.

Now, marginal tax rates are reduced to 20%. My take home pay is now $160. I spend $100 on goods, and now pay 25% HST and save $35.

My wallet sees no difference at the end of the week. So, I'm not saving anymore than before. Unless I have some Pavlovian response to HST above 15%, I'll still salivate and buy the same goods."

We agreed that when you made $200 and the marginal tax rate was 25%, if you could avoid paying taxes on some of those earnings by putting the money into an RRSP you'd do so?

You can avoid paying 25% HST by just not spending money - you don't even need to go through the hassle of opening up an RRSP. So wouldn't that option of avoiding some tax by not spending money i.e. by saving more make you think you'd like to increase savings?

Now, as a practical matter, I'm not sure that it does, because most people hardly save anything outside of their mortgage and other forced savings. But that's the theory.

This is actually a different point from the one Stephen is making in his post.

I was wondering actually if there might be some inducement from the lower income tax rate to work more, or would the knowledge that you're getting hit another way take that incentive away?

SG: You are arguing in your earlier blog that lowering Corporate tax rates increases investment. OK, I can agree with that. Beyond that, and I've read it a number of times, you've lost me. The premise is that Canada is lacking in investment at the current tax level. What's the proof? Can you have too much investment under your model?

Frances - you suggest that high levels of GST/HST encourages savings (discourages purchasing). So, do Nordic countries with high VAT rates save more than us? When cheap Chinese goods became widely available to Canadians through the infiltration of Walmart into Canada, did we save more due to having more net income available when an Eaton's toaster went from $48 to $12 at Walmart, or did we simply purchase more cheap consumer goods for the same amount of money?

"I've wondered about whether or not the reduction of the GST to 5% was part of some brilliant and overlooked master scheme to harmonize federal and provincial sales. Any political insiders know?"

One of the effects of the reduction in the GST (or the federal portion of the HST) is that is a shift in tax room to the provinces. We've seen in already with both Quebec and Nova Scotia increasing the QST and the Nova Scotia portion of the HST to eat-up the federal GST cut. And, I suspect that when the current (unsustainable) federal-provincial transfer agreement expires in a few years the federal government (regardless of who is in power) will tell the provinces that, if they want more money, they're more than free to take the extra 2% of GST revenue that the feds have left on the table, and use it to fund their programs themselves (as they should).

While the obvious motivation for the GST cut was political (the Tories wanted to get elected), given the Tories' ideological preference for keeping the feds out of the affairs of the Provinces, I have no trouble believing that having the provinces take over this tax room was not unexpected or considered undesirable.

More title suggestions:

The Plate of Beans: How to Overthink It.

Rate my thesis title: Hot or not?


First, my bias:

I see the this change (to HST) as essentially a long overdue reform.

Not perfect it its execution but better than what has preceded it.

*******

One way to look at taxes is social utility. In other words will the result of the tax be to promote more desirable activities and/or less of undesirable ones.

I think when it comes to consumption tax, the first social utility, in the absence of other factors is to say that those who consume resources are the greatest cost to society, and therefore ought to bare a proportionate burden.

In simple terms if you buy $1,000,000 worth of 'stuff' (be that homes, land or goods or services) you by nature have caused more cost to government and society than those who have bought $20,000 in worth of 'stuff'.

Of course, this is perfectly true for a long list of reasons. From how a product was produced, and where, to how long it was transported and by what means, to whether a given professional is performing a pubically desirable service and so on. However, calculating every last element of the preceding is recipe for both a hopelessly complex and by nature arbitrary system of taxation.

Better to address these issues, as appropriate though statue (legislation) rather than taxation.

On the whole, the change in system is beneficial from points-of-view that endorse fairness, simplicity and economic competitiveness.

*******

The one downside, arguably, is the lack of progressivity.

However, it should be noted that rent is exempt as are basic groceries, which constitute together more than 60% of expenses for most low-income families.

This has a very progressive effect, even before factoring in tax credits.

That said, that the tax credits are the one real knock on the new intiative.

As the rate of PST is 8% and GST 5%; one might reasonably expect the new PST tax credit to be 60% richer than the comparable GST Tax Credit.

At least in Ontario, that is not true.

Indeed not only is total credit lower, but its phase-out begins more than $10,000 sooner than that the comparable GST Credit.

If that one fact were addressed, I think there would no reasonable argument against the change.

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