The federal Conservative government will introduce legislation next week on which Ontario and British Columbia's plans to harmonize their sales taxes will stand or fall, delivering a powerfully problematic ultimatum to Liberal Leader Michael Ignatieff.
What's interesting here is that, contrary to the conventional wisdom that a tax reform that increases the visibility of a tax (e.g. from taxing business to taxing consumers) can only be realized by running away any sort of vote on the move, Harper's Conservative government appears to be standing firm.
As a Tuesday G&M article pointed out, "It was [federal Finance Minister Jim] Flaherty who began pushing the Premier [of Ontario] to adopt harmonization when the Conservatives came to power in 2006." I was working in Flaherty's Finance Department at the time and knew that harmonization was very popular amongst the economists there, which shouldn't surprise anyone since the HST is popular with economists and think tanks across the country.
According to Jack Mintz of the U of Calgary's School of Public Policy:
The 2009 Ontario Budget is a historic watershed in tax policy for the province. Both sales tax harmonization and a competitive corporate income tax rate will confer substantial benefits to Ontarians for generations. The marginal effective tax rate on capital investments in Ontario will be cut almost in half, leading in the long run to a 20% increase (equivalent to $47 billion) in capital investment, the creation of an estimated 591,000 net new jobs, and an increase in the annual incomes of Ontarians of as much as $29.4 billion.
If I might make an aside here, I would direct readers to a finding in this report that the 2009 METR in the USA is 26.9% versus 19.5% in Sweden. Having lived in Sweden more than a year I've long told anyone willing to listen back in North America that they have a false understanding of the Nordic countries if they think that the success that those countries enjoy as societies follows from taxing businesses. In fact I never detected the sort of anti-corporate sentiment in Sweden I routinely encounter in Canada. What Sweden, Denmark, and Norway do have is a 25% VAT.
Mintz is, of course, not alone. The Fraser Institute's economists addressed the situation in BC, saying:
Finance Minister Colin Hansen took a bold step in announcing that British Columbia will harmonize its sales tax with the federal Goods and Services tax. ...Exhibit 18 of a November 23 report released by Ontario's Competitiveness, Productivity and Economic Progress task force is titled "Most HST myths do not stand up to scrutiny." The task force, chaired by Roger Martin of the U of Toronto's Rotman School of Management, notes that:
Unfortunately, British Columbians will likely be exposed to many faulty objections and misperceptions regarding the HST over the coming weeks and months by those seeking to derail this reform.
- In Atlantic Canada, [post-harmonization] prices on all items fell by 0.3%
- Competition will prevent [gouging of consumers] - that was the experience in Atlantic Canada
- Increased revenue from the harmonized sales tax is matched by reductions in corporate and personal taxes and by tax credits. The effect is revenue loss [to the government]
A 2007 study by the CD Howe Institute found that "annual investment in machinery and equipment in the harmonizing provinces rose 12.1 percent above trend levels in the years following the 1997 sales-tax reform."
A January report by the National Bureau of Economic Research argued that globalization is making it harder for national governments to tax income and recommended that taxes be shifted more towards a consumption base.
The Cato Institute has said "Switching to a consumption based tax holds the promise of spurring greater economic growth and vastly simplifying the federal tax system."
In September California's Commission on the 21st Century Economy recommended "the elimination of the 8.84 percent corporation tax" saying a VAT-like " business net receipts tax (BNRT) would serve to replace these revenues." Back in July, I noted that "California has a higher corporate tax rate than average, and corporate tax revenues are significantly more cyclical than either income or consumption taxes." The Commission's report addresses this very point saying their proposed BNRT "will allow the state to reduce its dependence on other more volatile taxes – specifically, the personal income tax and the corporate income tax." While the BNRT is not as close to a HST as it should be (Charles McLure of the Hoover Institute says it would be more efficient if piggybacked on a federal VAT) Governor Schwarzenegger said if the Commission's recommendations were contained in a bill he would "sign it immediately."
Unconvinced? Read the summary that the Institute of Chartered Accountants (ICA) of British Colombia has written about the HST and all of the "Institute Links" and "External Links" available here. Richard Rees, CEO of the BC ICA, laments that this "more modern and investment-friendly tax" will not get a fair shake because "Good public policy does not always equal good politics."
Some conservative critics, such as the Economist, say that "... a broad consumption tax, such as a value-added tax... is economically efficient, but could too easily become a politically convenient way to vacuum up more money and expand government." A carbon tax would be preferable, says the Economist. A carbon tax may indeed be preferable, but there is considerable evidence that the Economist has the politics wrong here. Stephane Dion's proposed carbon tax went over like a lead balloon in Canada in 2008, while now in 2009 Stephen Harper's government has dared Dion's successor to kill the HST. Bruce Bartlett, a former Treasury Department economist (yes, we former national finance ministry economists have to give shout outs to our kind at every opportunity), has done some great work on this, noting that "the VAT is probably the ideal tax from a conservative point of view." Bartlett addresses the sort of argument advanced by the Economist in this New York Times piece:
Those countries that adopted the value-added tax since the end of the great inflation, however, have been very restrained in raising rates....Bringing the HST to Alberta by using it to fund a serious chop down in the statutory corporate rate (say, from 10% to 2%) would be opposed by the usual right-wing suspects who would demand that a tax cut not be accompanied by a tax increase in another area. But these people are penny wise and pound foolish because if revenues are not raised through a consumption tax they will inevitably be raised by taxes that attack investors and will be far more harmful to the economy. We've already seen this happen with stubborn resistance to a national carbon tax (which would have gone after consumers and thereby been paid by Canadians across the country) having led to a legion of calls for inefficient producer-whacking measures (which would disproportionately hit Albertans because the producers are here), not to mention colossal boondoggles like billions for carbon capture schemes.
me and other conservatives [have] conclude[d] that starving the beast simply doesn't work anymore. Deficits are no longer a barrier to greater government spending. And with the baby-boom generation aging, spending is set to explode in coming years even if no new government programs are enacted.
Once the sorts of studies that were done of investment and price levels in Atlantic Canada post-harmonization have been published with respect to BC and Ontario, a December 2009 decision by Michael Ignatieff's Liberals to support the government's HST enabling legislation may be remembered as the day their party dodged a bullet.
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