Promoting Consumption Taxation in Canada

Consumption taxation is making the news again in Canada.  Manitoba’s PST hike to 8 percent that was announced in April’s provincial budget kicked in on July 1^st.  At the public hearings into the increases and in the media, the increase has received a lot of criticism despite the claim the increase will be temporary and used to fund infrastructure.   Personally, I'm surprised politicians in their rhetoric would still claim a tax increase is temporary all these years after the temporary imposition of income taxes during World War One.  Meanwhile, Colin Busby and Alexandre Laurin at the CD Howe Institute have just put out an e-brief proposing that Alberta introduce an 8 percent HST and lower its personal income tax rate to 8 percent – a move they say would be revenue neutral.  Such a switch would lead to greater saving, investment and less volatile government revenues – a constant issue in boom bust Alberta.

Yet, consumption taxes are not popular with the public especially at the provincial level, which explains the popularity of the federal GST rate decrease despite chiding from economists and economic opinion leaders like columnists at the Globe and Mail.  Why?  Goods and services taxes are already a large share of total tax revenue at the provincial level.  Since the early 1990s, they have tended to fluctuate between 35 and 40 percent of provincial territorial tax revenue.  However, around 2002 they peaked at nearly 43 percent and then declined.   But since 2007 have risen from 35 percent to just below 40 percent.  At the federal level, on the other hand their share of total tax revenue has gone down from just under 30 percent during the early 1990s to about 20 percent. (see Figure) Naturally, the share varies quite a bit across the provinces but that data was a bit harder for me to get consistently over the 1991 to 2013 period during the current transition from the FMS to GFS statistics.

 

Consumption taxes are visible and the public has seen them going down at the federal level.  One could make the argument that shifting a larger share of federal tax revenues to income taxation (the more inter-provincially mobile tax base) and provincial tax revenues to consumption taxation (the less inter-provincially mobile tax base) is good fiscal federalism.  However, it was more likely short-term opportunism and populism rather than fiscal federalism theory that drove the federal move to lower the GST rate.  Yet the federal example of lowering its consumption tax rate is in some sense perversely complicating what would be good policy at a fiscal federal level – more reliance on consumption taxation at the provincial level compensating with lower income tax rates.  That is, the CD Howe proposal applied not just to Alberta but also the other provinces.  Indeed, the case was made (I think in Boadway, Robin (1992) The Constitutional Division of Powers: An Economic Perspective, Economic Council of Canada) that Ottawa might want to just rely on income taxation while the provinces get out of income taxation completely and just rely on consumption taxation.  Given public rancor over things like a PST increase, we probably are not there yet.

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Comments

[Guest]

All that and not a peep about the "revenue neutral" HST fiasco in BC?

I smell a science free agenda.

[Livio Di Matteo]

Well, living closer to Winnipeg, Manitoba news catches my eye more often. The HST business in BC seemed noisier last month at least based on my media scanning. Yes, the HST situation in BC and the debate over how revenue neutral it actually was as the return to the PST is being made is also a good example of the contentiousness of consumption taxation at the provincial level. The fact voters in BC voted to remove the HST in their referendum again illustrates my point about consumption taxation not being popular. I'm not sure I follow the comment about a "science free agenda". Do you mean the public debate in general is "science free" or is this a comment about me?

[Randy]

Here is a question that I have had for a while, but have been too afraid to ask. Is there a reason why consumption taxes couldn't be framed as something retailers have to pay, like credit card transaction fees? So, in the case of Ontario for example, instead of saying "In addition to the sticker price, the consumer has to pay an additional 13% in HST", you say "The retailer has to pay 11.5% of the sticker price in HST." (13% tax makes up 11.5% of the total after tax price, so the two schemes would be equivalent in terms of the proportion of a purchase paid in taxes).

People are okay with increasing corporate tax rates, because they're not the ones directly paying corporate taxes, even though they might be worse off in the long run because it. People are not okay with increasing consumption tax rates because they do pay them directly, even though they might be better off in the long run because of it. If you could frame it as something somebody else has to pay, namely the retailer, people might be able to swallow it better.

This would have the added benefit (in my opinion) that the price I saw would be the price I pay (as in every European country I've been to), so I would no longer have to mentally multiply my purchase by 1.13 before buying to know exactly how much I'm going to have to pay.

[Randy]

Or, which might be simpler, is there anything wrong with legislation that sticker prices had to be tax-inclusive? Do you think that would make it easier for people to swallow increases in consumption taxes?

I believe that is what's done in Europe, since many of my receipts from purchases there showed how much tax I paid, even though it was included in the sticker price.

[Guest]

"science free agenda" was referring to the HD Howe piece

[Evan]

@Randy. Nothing wrong with that legislation at all (as far as I can tell). Australia has that legislation, and it seems like an improvement.

I'm not sure whether it makes the taxes easier to swallow - to deal with that problem I would like to see improved education regarding tax incidence. I worry that telling people that the business is now paying would simply compound the ignorance.

[Livio Di Matteo]

Guest: Thanks for clarifying.

[Livio Di Matteo]

Randy: Consumption taxes can be levied on the buyer or the seller. However, the economic incidence of the tax depends on the elasticity of the demand and supply curves of the goods in question rather than who the tax is levied on.

[Determinant]

Randy:

Legally it can be done and there is provision for it with respect to the GST/HST in the Excise Tax Act, which covers those two taxes. AIUI those provisions have never been proclaimed into force.

In a fit philosophical neo-liberalism the Mulroney Government decided to use tax-exclusive pricing so that people would constantly be reminded of the tax and demand that it be lowered.

There was also debate in legal circles as to whether the Federal Government has the power to mandate tax-inclusive pricing as that could be a case of Property & Civil Rights, which is a provincial jurisdiction. The current legal consensus is that the Feds do have that power, but of course you could count to do the Supreme Court reference with Quebec on the other side....

[Bob Smith]

Randy,

The feds could clearly choose to impose GST/HST on retailers (as they do with other forms of indirect taxation, such as customs duties and other excise taxes). Moreover, even without imposing taxation on retailers, the feds could force the retailers to move to tax-inclusive pricing. As determinant points out, there are already provision of the Excise Tax Act to give effect to tax inclusive pricing for GST/HST purposes if the feds ever decide to activate those provisions.

The Provinces, however, can't, since their taxing powers are limited to direct taxation (I believe there was a reference/case around this point back in the 1990's when Quebec implemented the QST to parallel the GST - the court determined that the QST (and implicitly the GST) is a direct tax, since it is a tax on the consumer, and that the QST was legal).

I think the political impact of tax-inclusive pricing is probably over-stated. As you note, the receipt still shows the tax, and you can be sure that retailers would be eager to point out the portion of the bill that's on the government's account (when Ontario switched to the HST, Jack Astor's receipts described the provincial portion of the HST as the "McGuinty Sales Tax" - to emphasize that the higher cost of a meal was on account of Dalton McGuinty). We see that now with gas stations outlining the various federal excise taxes on gas.

Moreover, the assumption is that "hiding" the tax will reduce the perception of it. But I'm not sure that's true. I seem to recall surveys from the US where people believe they pay much more in taxes (and at much higher marginal rates) than they actually do, likely because their pay checks are "tax-inclusive" (or, perhaps, "tax-exclusive" - they see the after-tax result, but don't necessarily compare it with the pre-tax results. Personally, I'm always shocked how low my actual tax bill is at the end of the year when I actually do my taxes, certainly it's less than I would have thought if I looked looked at my pay stub. I'd suggest that a likely result of "hiding" the HST will be that people will believe that they pay much more than they actually do, and that the "politicians are hiding it".

[Determinant]

The Provinces, however, can't, since their taxing powers are limited to direct taxation (I believe there was a reference/case around this point back in the 1990's when Quebec implemented the QST to parallel the GST - the court determined that the QST (and implicitly the GST) is a direct tax, since it is a tax on the consumer, and that the QST was legal).

The fact that there is "tax-exclusive" pricing is neither here nor there as it still the merchant who is liable to remit the tax to the Receiver-General. The Direct/Indirect Tax distinction has been irrelevant since the 1940's with tax deductions at source. Other than keeping provinces away from traditional customs duties, the distinction is nearly meaningless today.

Whether the GST/HST is direct or indirect is legally irrelevant for the Feds as they are not restricted in their forms of taxation. With that said, I doubt any modern court would call a PST/HST an "indirect tax" and even if it did, there would be a constitutional amendment in very, very short order to rectify the situation. But the court's presumed opinion is really driven by the fact that we let provinces have significant fiscal autonomy in Canada.

In contrast the High Court of Australia is the Supreme Court of Canada's nemesis. The High Court is extremely centralist while our Supreme Court is protective of the provinces. In Ha v. New South Wales, 1997 the High Court invalidated all Oz State tobacco taxes, franchise fees, etc. invalid. This was after the High Court stripped the States of their income-taxing powers in 1942 and 1957 (First and Second Revenue Cases).

[Bob Smith]

"The fact that there is "tax-exclusive" pricing is neither here nor there as it still the merchant who is liable to remit the tax to the Receiver-General."

It may be economically irrelevant, but legally it matters. Moreover, while the supplier is liable to remit the tax to the CRA, once it does so, it has a statutory right of recovery against the consumer. If it was liable for the tax, it wouldn't (although it might have a contractual right, depending on the terms of the supply contract - not every supplier thinks of putting a provision in their contract requiring the other side to pay applicable HST).

"The Direct/Indirect Tax distinction has been irrelevant since the 1940's with tax deductions at source."

That's not really a great example, since if your employer fails to withhold on account of your income tax, it's liable for interest and penalties, but not for the tax.

" With that said, I doubt any modern court would call a PST/HST an "indirect tax" and even if it did" Well, we know how a court would rule, because we know how they did rule in the QST refenece (http://www.thecanadianencyclopedia.com/articles/quebec-sales-tax-reference)

[Evan]

This is somewhat off topic, so feel free to intervene Livio.

@Bob Smith: "It may be economically irrelevant, but legally it matters."

I've never really understood this line of argument. If we are discussing policy matters, then surely we shouldn't be averse to changing the law to be favourable towards whatever policy is deemed best.

[Bob Smith]

"If we are discussing policy matters, then surely we shouldn't be averse to changing the law to be favourable towards whatever policy is deemed best.

Sure, we could amend the constitution, but that hasn't worked out particularly well the last couple of times we've tried it (Meech Lake, Charlottown). Given the competing (and inconsistent) demands for constitutional amendments between the various provinces/groups, reopening the constitution for the dubious purpose of allowing provinces to impose indirect taxes (I say dubious because, in practice, if they're so inclined, they can achieve the same thing with direct taxation and tax-inclusive pricing) seems like more trouble than it's worth.

[Bob Smith]

Just on further though, indirect taxation at the provincial level does raise federalism concerns, if it would allow one province to, in effect, tax the residents of other provinces. No doubt part of the thinking behind limiting provincial taxing power to direct taxation of provincial residents was to prevent provinces from trying to indirectly tax the residents of other provinces. This obviously isn't a concenr for the federal government.

[modified GRF 1-29]

Major thanks for the blog article.Much thanks again. Really Cool.

[Determinant]

@Bob Smith

That was likely the case, if we equate "Indirect Tax" with "Excise or tariff". The Constitution further forbade the levying of duties on interprovincial trade.

I've never really understood this line of argument. If we are discussing policy matters, then surely we shouldn't be averse to changing the law to be favourable towards whatever policy is deemed best.

The Living Tree Doctrine, which our Supreme Court is so fond of, takes care of many of these issues. That's why the last substantive policy amendment was Section 94A which authorized CPP/QPP.

In practice, many and most of the interesting policy initiatives fall within the heading of "Property & Civil Rights" which is a provincial power. There are people (like me) who think this heading has been interpreted over-broadly and should be narrowed, but we're a minority.

I have a proposal which I presented to the NDP Convention to amend Section 94 to allow provinces to delegate power to the Feds for five years, after which the delegation must be renewed or it defaults back to the province who delegated it. In my opinion it's a good way to put programme-oriented constitutional amendments "on probation" for a while and then lets a province hit the eject button if they start to feel uncomfortable for whatever reason.

They do this in Australia all the time. The Charlottetown Accord would have written a great many Australian features into our Constitution so the trend is already there.