The case for stealth taxation

According to Rosen et al's widely used public finance textbook:  “…it is generally agreed that visible taxes are preferable to hidden taxes…."

It is, in some ways, a strange assertion. The standard economic analysis of taxation assumes that taxes' superficial aspects - things like who is legally responsible for collecting the tax - are largely irrelevant. Taxes change behaviour because they introduce a wedge between the before tax and after tax price of a good. A tax's impact on economic efficiency is a function of the size of that wedge. A tax's impact on equity depends upon the relationship between an individual's tax burden and his or her income. Neither efficiency nor equity depend upon visibility.

The argument that Rosen et al give in favour of visibility is, in fact, a political one: 

Canadians need to know how much they pay in taxes in order to make informed decisions about the level of public sector spending that they are prepared to support. Public awareness of taxation levels is essential in achieving a reasonable balance between the private and public sectors’ provision of goods and services...

I'm not convinced. Here's why.

First, when it comes to taxes, what you see isn't always what you pay. For example, suppose you pay $700,000 for a new home in BC's Fraser Valley. Under BC's Harmonized Sales Tax (HST), taking into account BC's new housing rebate, $57,750 in HST will be added to the price of your home. $57,750 is the visible tax burden. But the actual tax burden might be far lower. People can only afford to pay so much for a new home. When a tax increases the after-tax price of homes, property developers a choice: keep the before-tax price the same, and leave some homes unsold, or lower the before-tax price. Tax incidence analysis predicts that the actual burden of a tax will fall upon whichever party is unable to move, or change their behaviour, in order to avoid that tax. When a tax is imposed on housing, the current land owner is the one who can't move. That's the person who actually bears the tax burden.  

Visible taxes can lead to bad policy choices when a tax's visible incidence is different from its actual incidence. The average tax payer will vote for a tax/benefit scheme that appears to be in his or her interests - for example, increased health care spending financed by increased corporate income taxes - not realizing that the burden of the corporate income taxes might be shifted forward onto customers or backwards onto employees - in other words, right back onto the average tax payer.

Second, there's the problem of second best. A system with a mix of visible and invisible taxes can produce worse policy choices than a system which has only invisible taxes. 

The federal GST or goods and services tax is a case in point. The GST is a value added tax. It replaced a particularly dysfunctional (small base, high rate) manufacturer's sales tax. Almost all economists considered the GST superior to the old sales tax. However it was extremely unpopular among the general public. The reason is simple: the old manufacturer's sales tax was invisible, so people couldn't tell how much they were gaining when it was eliminated. The GST was visible, so people could see the increase in their tax liabilities. As a result, they over-estimated the net impact of the GST on their tax liabilities. (To be fair, people weren't entirely stupid: manufacturers were slow to pass on the tax savings created by the elimination of the manufacturer's sales tax.)

Rosen et al argue that "Most economists view the visibility of the GST [goods and services tax] as one of its beneficial characteristics.”  The political opposition to the GST and now the HST (harmonized sales tax) should make "most economists" reconsider this view.

A third argument against visible taxes is that they increase the efficiency cost of taxation. For example, the complex web of taxes facing by a middle-income earner - Employment Insurance and Canada Pension Plan premiums, federal and provincial income taxes, the loss of refundable sales and child tax credits, consumption taxes - make it hard for the average person to work out his or her marginal tax rate. If this complex tax web was replaced by a single flat-rate tax, people could easily work out their marginal tax rate - and might then decide it wasn't worth working.

A 2009 piece by Congdon, Kling, and Mullainathan that surveys a number of empirical studies argues that "When policymakers can choose to keep some taxes hidden from consumers, this will keep the elasticity low, which, other things equal, is desirable for efficiency purposes." The authors stop short of advocating stealth taxation, however, concluding that "Resolving the net welfare consequences of tax salience is thus an important future line of research."

Fourthly, to the extent that people dislike paying taxes, more visible taxes are more likely to be evaded. Evasion is a problem in part because it reduces the tax base. Thus, in order to maintain revenues, governments must levy higher taxes on those who comply, reducing economic efficiency and giving even more people an incentive to evade taxes.

Evasion and visibility pack a double-punch when it comes to entrepreneurs and the self-employed. Taxes are more visible to the self-employed than to employees -- sitting down and writing a cheque to the government is more noticable than having taxes deducted from from a direct-deposit pay cheque. The self-employed also have relatively more opportunities to avoid and evade taxes - by inflating home office expenses, for example, or accepting cash payment for services rendered. Susan Morse's study of small businesses in the US found "Most self-employed and small business taxpayers cheat on their taxes. In fact, in the aggregate, they fail to pay about half the tax they owe to the government, and this unpaid tax amounts to about $150 billion annually." 

If sectors of the economy dominated by small businesses end up paying a lower tax rate, due to extensive tax evasion, than other sectors of the economy, this distorts the overall balance the economy. 

Also, tax evasion is catching: I'm happy to pay my fair share, but I don't like paying taxes if everyone around me is evading.

A final argument for stealth taxation is that it facilitates budget balance.  People want good things from their governments, like health care and old age pensions. But they don't want to pay taxes. So the temptation is to vote for spending initiatives and vote against any tax increases. When taxes become more visible, people become more aware of the taxes that they are paying, and lobby harder for tax cuts. The result: future generations are burdened with debt and taxes.

Now the argument could be made that in fact invisible taxes contribute to government debt - if the average voter realized how little he benefited from the Bush (Bush-Obama?) tax cuts, how much those tax cuts benefitted the richest Americans, and just how mind-bogglingly rich the richest Americans are, perhaps he would have voted against them. I don't know of any decisive evidence on this point, so if you disagree, feel free to say so in the comments.

Some degree of visibility in taxation is desirable - without information how the tax system works, and who bears the burden of taxation, it is difficult to make good policy decisions.

But a little goes a long way...

(This post draws from my latest column in the Globe and Mail's economy lab).

Comments

[Determinant]

Sure, the HST is great economics and lousy politics. Rosen's quote simply agrees with my notion that if you scratch an economist you will find a politician. It would be nice if Rosen's (and others making that sort of argument) admitted they were engaging in politics rather than economics.

ISTM that economists like Rosen are ignorant of the retail side of politics, politics as sales as presented to individual voters. It makes the viewpoints he posits in his text seem rather hopeful and idealistic.

I will also observe that as one of the few supporters of the HST in Ontario, many people in fact agreed with me once I explained input tax credits and personal sales tax credits. The vast majority of people don't know and don't care how they work. Voters generally don't file business returns and don't care about business taxes, they also don't care about a single government cheque among many.

I believe the best answer is for economists to spend more time among the advertising and marketing profs in the Commerce Faculty.

[Mike Moffatt]

"I believe the best answer is for economists to spend more time among the advertising and marketing profs in the Commerce Faculty."

Agreed! Or you can do what I did and *be* an economist that researches marketing.

[Mike Moffatt]

e.g. Conroy's Acura: Customer Lifetime Value and Return on Marketing.

[Determinant]

The best economics advice I ever received came from a life insurance salesman (passed on from another several decades before): never forget people are both greedy and stupid.

[Frances Woolley]

I suspect that another reason the HST failed in BC is that the proponents overstated their case (see this post). I was just chatting to a BC friend over the phone, who pointed out that the government owned liquor stores didn't lower their before-tax prices when the HST was introduced-- even though the switch from PST to HST was supposed to lower input costs and thus before-tax prices. So people started wondering about the claims of the pro-HST side. (My friend did vote pro-HST however).

[Determinant]

The other thing is that the divergent tax bases of the PST and GST meant that on an individual level the pre and post-harmonization effective rates could never be equal or even accommodated for. Sure "transition payments" help but they can't address each individuals different purchasing habits. Some people were always going to pay a bit more and that could never be done away with.

[Stephen Gordon]

Frances: Fabulous post. And this sentence

Visible taxes can lead to bad policy choices when a tax's visible incidence is different from its actual incidence.

deserves to be quoted again and again.

[Stephen Gordon]

I've always wondered about the 'visible tax is best tax' line; it only seemed to make sense if your goal was to make the tax annoying in its own right. But you're absolutely right to point out that if you're going to make that political economy argument, what should be visible is the tax you actually pay. Not the legal incidence.

[Shangwen]

I accept the wisdom of this, but it's hard to take politically in some ways. Is there a government (and elite civil service corps) that is willing to execute a tax policy based solely on economic efficiency, without also doling out inane tax credits for special interests and feel-good causes?

[Determinant]

Public Servants design policy. Politicians then edit that policy to conform with their political wishes. Then then discuss it in the House of Commons and get the Governor General to sign it. This is customarily referred to as "Democracy".

Disclaimer: I hope to join the Public Service of Canada in the near future.

The GST actually has few loopholes and is as near an example to a "policy-pure" tax that Canada is ever likely to see. But it was political suicide.

The atrocity that is the income-tax system is something else altogether. Sure we can get rid of tax credits, exemptions and other tax expenditures but what do we do with the mother of all tax expenditures: retirement savings.

If somebody want to do a post on the economics of tax expenditures in the retirement system please be my guest.

[Evan]

There is also an argument to be made that hidden taxes (i.e. taxes included in the posted price) can improve efficiency: most people aren't very good at multiplying by 1.12, and make decisions based on the posted price rather than the actual price. This distorts decisions.

[Andrew F]

I've heard it repeatedly said, "How nice would it be if the sticker price included all applicable taxes." Gasoline is sold this way, why not everything else?

[Frances Woolley]

Stephen - thanks, and yes.

Evan: "most people aren't very good at multiplying by 1.12, and make decisions based on the posted price rather than the actual price" -

If people make decisions based on the posted price, then this should *decrease* the efficiency costs of taxation - people ignore the tax wedge, and so the actual outcome is closer to the efficient no-tax equilibrium..

There are several papers that purport to document this claim, i.e. people make decisions on posted not actual prices. But I wonder if that same result holds in Canada. I think that people just figure that HST is a lot, and as you say, aren't very good at multiplying by 1.12. Which could lead people to overestimate, as well as underestimate, the actual tax burden.

Determinant - one pro-HST argument is that the HST is one of the few taxes that would really have hit wealthy pensioners, the ones who spend their income on landscaping services and financial services and .... This group receives particularly sweet tax treatment under the income tax act with income splitting, age amounts, pension amounts, etc.

Andrew F "why not everything else?" When GST first came out, Eaton's included the GST in the price. And look what happened to them...

[Determinant]

That wasn't an argument I saw made here in Ontario, though I will buy it.

Retirement and pensions are thorny issues for several reasons. First this segment often has a righteous, er, keen sense of entitlement.

Second, the retirement system does not distinguish between return of capital in the form of RRIF income and life-guaranteed annuity income. The employer side also fails to make this distinction. In Ontario Employer-sponsored DC pension don't have to be annuitized.

There is the curious micro observation that Canadians think employer-provided Defined Benefit Pensions, which are nothing other than life annuities in payout are the greatest thing ever but when you ask them to purchase a life annuity with their own savings they sulk, balk and spit nails.

Pension policy in this country has singularly failed to stress the importance of securing an income through a life annuity. That is, on the micro level, the largest issue we have. British pension policy is much better in this regard and their annuity market is larger. Should I mention that RRSP's were originally Registered Annuity Contracts? While I'm on it I strongly suggest British pension and retirement studies, literature and commentary to Canadian readers, the content and context is far more like Canada than the United States ever is.

The people in this market segment right now got scared stiff by inflation in the 1970's and 1980's. Nick has had many threads illustrating that we don't live in this inflationary world anymore but it doesn't make a difference.

Pension envy is really nothing more than jealousy over people who have employer-provided life annuities and spend accordingly.

So yes, a consumption tax that hits annuity spenders who spend large and doesn't hit frugal retirees trying to life on returned capital is just the thing. The fact that it acts based on voluntary micro choices is what makes it so great.

[Nick Rowe]

Shangwen articulates my own unease too. Frances' arguments are good ones. But would we want to live in a world where we never saw what taxes we were paying and what it was spent on?

You know those signs they put next to highway improvements? "We spent $X million to give you this better highway, aren't we good to you!" There is obvious political propaganda in such signs. And it's *our* money they are spending on *us*. But at the same, there is a degree of transparency there too. Like a very public audit statement. "This is where we spent some of your tax dollars, and this is what it cost to fix this road."

[Frances Woolley]

Nick - truth is good. But a partial truth might be worse than no knowledge at all.

For a voter to figure out whether or not a tax policy is in her own interests- be a rational voter - she needs to know how it affects the "tax price" she pays for government services. E.g., does a tax reform increase or decrease the price she pays for highways. The tax price she pays is her *share* of government revenue, i.e., her taxes/all tax revenue raised.

Unfortunately taxes are like housework - people tend to very highly aware of their own contributions and unaware of other people's contributions. In this situation, highlighting people's own contributions is not necessarily a good idea. The hard-to-obtain information is what other people are paying in taxes.

Would it be a good idea to tell people, when tax cuts are proposed, who gains and who loses, what government services will be cut, and what the cost on future generations will be? Yes. But that never happens. Instead, we get "the tax cuts will pay for themselves through higher growth." The US's disastrous love affair with debt shows where that path takes you....

I would like to live in a world where tax evasion and avoidance was minimal, everyone paid their fair share of taxes, governments could raise sufficient revenue to provide public infrastructure/decent services, and governments had minimal debt. I'm not convinced that a highly visible tax system helps us get there.

[Livio Di Matteo]

I was in the UK last week and their VAT - which was 17.5 percent - was built into prices. Given the exchange rate and the fact the price included tax, British prices actually did not seem so bad relative to prices here.

[Jim Rootham]

The price of an individually purchased life annuity is far higher than a group one. Of course people spit nails.

[Frances Woolley]

Jim: "The price of an individually purchased life annuity is far higher than a group one. Of course people spit nails." Yup. Because of the market failure of adverse selection - only people who figure they'll live to be 100 buy annuities. No one has a way around this, other than mandated coverage/forced pooling.

Livio: "British prices actually did not seem so bad relative to prices here" Especially for beer, cheese, jam, tea, branston pickle, marmite and shoes.

[Livio Di Matteo]

Frances
Quite correct. Real estate was another matter.

[Determinant]

Not so fast, Jim. True Group Life Annuities sold by a life insurer are rare in Canada. Pension Administrators don't like them because they are "expensive" which is actually false for the additional protection being offered.

Not mentioned is the fact that the underwriting and capital standards for life annuities are much higher than for pensions and the fact that life annuities are insured against default by Assuris, which guarantees them 100% up to 60K a year in payments and 85% thereafter. This protection is available nationally. Life insurers are in the business of making payment promises, of course they take default in the industry seriously.

It makes Ontario's Pension Benefits Guarantee Fund look like a sick joke.

Part of our pension problem is we have persistently underpriced the annuity costs of pensions for decades. We systematically underpriced the longevity risk, overestimated returns and not pooled the risk enough in most cases.

[K]

Frances: "If people make decisions based on the posted price, then this should *decrease* the efficiency costs of taxation - people ignore the tax wedge, and so the actual outcome is closer to the efficient no-tax equilibrium."

I think you ignore the budget constraint. If they are going to maximize their own utility, they need to take the tax into account, or they'll be really disappointed when they discover they have less wealth than they expected. Once you have a tax you can no longer consider the no-tax consumption vector to be desirable. Pareto efficiency (conditional on existence of the tax) can only be achieved if everyone is fully aware of the full cost of everything - but how much of the price consists of tax is totally irrelevant.

[Evan]

@K: This is the idea that I had in mind.

I'm curious to know what the Canadian reaction would be to a law mandating that posted prices include all applicable prices?

[Frances Woolley]

K - Michael Smart made this argument on twitter, citing this paper by Raj Chetty on "The simple economics of salience and taxation."

Evan - I imagine that people would hate it. Then they'd get used to it.

[Bob Smith]

Determinant,

The non-taxation of savings (retirement or otherwise) is only problematic if you think the appropriate tax base should be income. If, on the other hand, you think that the better tax base is consumption, then the non-taxation of retirement (and other) savings is not problematic - they shouldn't be taxed. Indeed, the shift to a consumption tax base, at least for the overwelming majority of Canadians (more recently with the introduction of TFSAs) is one of the most significant, and least appreciated, changes in Canadin tax policy over the last decade.

[Bob Smith]

Evan: "I'm curious to know what the Canadian reaction would be to a law mandating that posted prices include all applicable prices?"

Intriguingly, such a law is (almost) already on the books. The Excise Tax Act (under which the GST and HST is enacted) already includes provisions for Tax-inclusive pricing which have been enacted by parliament (and have been since 1997), but not proclaimed by the governor general (proposed Division XI). A condition to the proclamation of those rules is that provinces representing 51% of the provinces that impose PST or HST have enacted legislation for tax inclusive pricing.

[Bob Smith]

I'm not sure that "stealth" taxation necceasrily avoids the problems of evasion that Susan Morse describes. The reason that employees can't/don't cheat on their taxes (and small businesses can) isn't because the taxes aren't visible - they are to anyone who looks at their pay stub (and a depressing thought it is too). The difference is one of coordination. To avoid paying taxes, employees have to be able to pursuade their employers to not comply with the applicable tax laws (which, for employers, becomes very risky if you more than a handful of employees, since the likelihood of being caught increases with the number of people involved). Plus, non-compliance is costly for employers, since unless they're cheating on their own income taxes (always possible, but adds another layer of risk to the equation), that denies them a deduction for employee salaries. It's just more complex to cheat on taxes in those circumstances. The self-employed don't have these problems.

In the context of the HST, whether or not HST is inclusive in the price, it's ultimately up to the supplier to decide whether they want to collect and remit it (or not). In a tax-inclusive pricing regime, you can't tell if the fact that contractor A is cheaper than contractor B by 13% is a function of being more efficient, or because contractor A isn't going to report HST. I don't know how many people snitch to the CRA about suppliers who don't charge HST, but to the extent there are any, visible pricing makes it easier to do so. And from an audit perspective, it's easier for the government (when auditing recipients of supplies) to figure out if suppliers charged HST or not if its right there on the invoice.

[Bob Smith]

Moreover, I think the United States might be an example of the dangers of stealth taxation.

While most Americans pay little, if any, income tax (and pay far less tax than they consume in public services) most Americans also believe that they pay a significant amount of taxes (and significantly more than they should). And this shows up in opinion polls. Consider this Gallop poll (http://www.gallup.com/poll/117433/Views-Income-Taxes-Among-Positive-1956.aspx). Apparently opposition to income taxes has reached an all-time low during the reccession, with "only" 46% of Americans thinking that taxes are too high (compared to 48% who think they're just right and only 3% of Americans, apparently including a handful of billionaires, think that their taxes are too low). For most of the past 50 years, more than 60% of Americans thought that taxes are too high. And it's even more remarkable when you consider that almost 40% of people earning less than $30,000 thought that income taxes were too high, even though most of that population would have been drawn from the 142 million Americans who didn't pay a dime in income tax.

Mind you, those Americans were undoubtedly subject to other payroll taxes and withholdings, wihch is probably why they believe that they were subject to income taxes. You wonder if the same Americans would be so vehemently opposed to income taxes (and potential increases) if they got a bill at the end of the year saying, "please pay us $0 income taxes" (and, more likely, also saying "and here's a check for working and raising kids this year"). Tax ignorance works both ways.

[Jacques René Giguère]

Bob Smith: tax opposition in the lower economic segments if the U.S. population is partly rooted in the gross overestimation of their potential upward mobility. The U.S. has the lowest upward mobility of all modern western countries ( but are the U.S. a MWC?...), thanks in part but not completely to the South and the situation of Afro-Americans but most Americans sincerely believe they will go up. And then , when it doesn't happen, blame the guys below them...

[Frances Woolley]

Bob - "almost 40% of people earning less than $30,000 thought that income taxes were too high, even though most of that population would have been drawn from the 142 million Americans who didn't pay a dime in income tax."

That's an interesting point.

[Bob Smith]

Jacques,

That may be part of the explanation, and hey, there are probably a ton of otherwise middle-class college students in that category, so maybe it isn't entirely an illusion.

But perhaps that problem is linked to a widespead misunderstanding of what people's (pre-tax) incomes actually are. I don't know if you've ever seen Gail Vaz-Oxlade's show "Till Debt Do Us Part", in which she takes over a family in financial trouble and helps sort them out (with tough love and a hint of lovely Jamaican accent - it's a guilty pleasure, if only because it makes me feel better about my own finances). What strikes me about the show is how often the families have no idea what their TAKE-HOME pay (let alone pre-tax pay) actually is. Now, obviously, this is a subset of people who are sufficiently financial troubled to be on the show, so might not be representative (although, scary thought, maybe they are). But if you don't know what your pre-tax pay is, you might (a) believe that it's more than it actually is, and (b) and that if it hasn't gone up or is low, it's because of taxes.

And that misapprehension is compounded by a widespread misunderstanding of the tax system. Again, if go to Vaz-Oxlade's blog, it's striking how many people believe that if they take on another job, or earn more income, they might take-home less money (i.e., that marginal tax rates exceed 100%).

[Determinant]

Bob:

Frances's example was discussing spending pension income, which is no longer savings. The tax paradigm for pensions and RRSP's is EET, taxable only when received as income in retirement. For TFSA's it is TEE, taxable as income when received while working.

I said nothing about the taxability of pension or retirement income, only ability to spend it when received as annuity income vs. return of capital income.

[Andrew F]

"In the context of the HST, whether or not HST is inclusive in the price, it's ultimately up to the supplier to decide whether they want to collect and remit it (or not). In a tax-inclusive pricing regime, you can't tell if the fact that contractor A is cheaper than contractor B by 13% is a function of being more efficient, or because contractor A isn't going to report HST. I don't know how many people snitch to the CRA about suppliers who don't charge HST, but to the extent there are any, visible pricing makes it easier to do so. And from an audit perspective, it's easier for the government (when auditing recipients of supplies) to figure out if suppliers charged HST or not if its right there on the invoice. "

Customers will still see the HST they are paying, as they will be able to claim the input tax credit from the HAT embedding in the prices they pay.

I suspect many small businesses collect HST from their customers but don't fully remit the amount of to the government.

[Determinant]

Bob:

This arises from the fact that many payroll administrators are chronically unable to handle anything other than ordinary pay in determining income tax. Fill out your TD-1 properly, or submit a T1213 for RRSP payments (tax reduction at source) and they will turn about in loops right in front of you. I have seen in myself when I did exactly that, on multiple occasions, with different companies.

Thanks to google I found that there is CRA Bulletin on this, you perform a calculation and get a code letter to determine income tax payable based on credits declared.

It boggles most payroll people, however.

[Tim]

Bob:

My understanding is that the three original Atlantic HST provinces have enacted tax included pricing legislation re: proposed Division XI of the ETA. So in theory if Ontario were to follow Ontario + NS,NB,NL would be greater than 51% of the population of HST or PST provinces(BC + NS, NL, NB would not or QC + NS, NL, NB for that matter). At this point my distant third hand understanding is the the Ontario Ministry of Finance advised the McGuinty govt to hold off on any tax included price legislation until all of the transitional issues with the HST and winding down the RST had been worked through. So you may very see something on this next year coming out of the Ontario legislature.

[Bob Smith]

Tim,

I hadn't heard that, but I appreciate the update. Query, though, whether the population condition will be satisfied. In order for the tax-inclusive rules to come into effect, provincial legislation has to be enacted in provinces representing 51% of the population of all provinces having HST or provincial sales tax. As of 2010, the populations of Ontario and the three Atlantic HST provinces was only 50.9% of the total populations of PST/HST provinces (15.412 million out of 30.287 million Canadians excluding Alberta and the territories) and it isn't clear that Ontario's population growth is sufficient to offset the slow growing Atlantic provinces, which means they'll still have to pursuade one of Quebec, BC, Sask., Man. or PEI to sign on. If Quebec really harmonizes the QST with the GST (as opposed to the current pseudo-harmonization), then they might be an easy sell (under the circumstances, BC might be a harder sell, but the Feds do have some hefty leverage over them - i.e., the $1.6 billion that BC has to reapy)

[Tim]

Bob:

I had not actually looked at the math closely enough to realize that Ontario plus NB, NS, NL is only 50.9%. I knew Ontario's approval was needed almost no matter what realistically to do this. In the past I have been told that any of the PST provinces or QC with their own provincial QST legislation could cause problems for themselves constitutionally vis a vis "direct" vs "indirect" taxes by imposing tax included pricing. However, past discussions I have had here on WCI have indicated to me that the GST/HST, QST, PST are all "direct" taxes and that tax included pricing would be unlikely to change that status.

Probably at this point if Ontario + Atlantic provinces don't equal 51% the next best option is to get Quebec or PEI on board. PEI is actually an interesting situation and if I had to bet money will be the next province to introduce the HST. The real issue in PEI is that the PST rate is 10%(the highest in the country) and like Quebec is tax on tax vis a vis the GST. The premier has already indicated he is favorable to the HST but wants a financial deal more akin to the one NL, NS, and NB got in 1997(a lot of financial "deal" back then was hidden when Martin made capital tax payments a deduction from CIT something highly beneficial to the maratimes at that time but no longer that relevant) than what Ontario and BC to make up for the revenue loss of getting provincial portion rate down to 8% or even getting rid of the tax on tax status. From an investment competitiveness standpoint PEI is also going to be pretty exposed next year when Nova Scotia finally gets rid of their corporation capital tax also.

[Bob Smith]

Tim,

I suspect as a practical political matter, they'd have to get Quebec on-board (federal politics being what they are). I note that the 51% condition is a neccesary condition for the implementation, but not an automatic one, so the timing is still left to the discretion of the feds (so even if 51% were on board, the government could hold off getting royal assent, if the provinces kicked up a storm). Who knows, that may be part of the ongoing federal government/Quebec negotiations over harmonization.

WRT PEI, I've always been a bit surprised that PEI hasn't shifted to an HST system (and annoyed, it makes life harder for tax advisors). Given the reduced GST rate, they could keep the 10% provincial portion and harmonize with the Nova Scotia. I have to think there'd be significant savings from a compliance perspective (since they wouldn't have to operate their own enforcement branch) and they'd probably be better able to tax things like e-commerce or mail order sales which are either outside the existing PST system (or simply don't comply with the PST sytem, given PEIs small reach).

[rabbit]

It might be good economics but its poor democracy. If people are to vote wisely they must be informed, and to be informed we need transparency.