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Four Reasons Why the Left Should Love the HST

In fact, progressives should clamour for a higher rate, with targeted tax credits to make it just.

Krishna Pendakur 29 Jun

Krishna Pendakur is a professor of economics at Simon Fraser University.

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Want to grow tax revenue? Raise the HST.

At some level, it is puzzling that the left is all up in arms against the HST. After all, it is a tax. Are we not supposed to love taxes, because we love to spend on public goods such as health care, education and the environment?

There are four big reasons that the HST is good.

First, the federal government gave us $1.6 billion to switch. And if we switch back, we have to pay them back. That is $400 per person in B.C., either more taxes or less public spending.

Second, as we all know, we give preferential tax treatment to some things and activities, things and activities that we value socially. For example, we did not charge GST/HST on medical goods and services or on children's clothing. Not taxing them is subsidizing them (compared to taxing them). Subsidizing things we intend to subsidize is good. In contrast, subsidizing things we do not intend to subsidize is bad. Why do you suppose the PST applied to goods, but did not apply to services? It was not because we, as a society, felt that services were somehow socially valued and deserve subsidies. It was because at the time the tax was instituted, it was difficult to tax services because the economy was on the whole less electronic, less bank-oriented, and harder to monitor and police. So, the PST gave preferential treatment to services for reasons having nothing to do with a social consensus regarding the need to subsidize services, but rather for technological reasons that no longer apply. It is better to tax all goods and services, and make exceptions for those that we explicitly intend to subsidize.

Third, the "blue-ribbon" report released last month said that, in combination with the associated refundable tax credits (read: cheques from the government) for low-income households, the HST on net helps families in the bottom fifth of the income distribution and hurts everyone else. They estimate that it will cost $350 more per family than the old PST/GST combination. If you are worried about the impact of the HST on, say, the second fifth from the bottom (the bottom fifth gets those cheques), then you could clamour for cheques to be written for them, too. Canada Revenue Agency is extremely good at writing cheques (as well as at accepting them), and if B.C. tells them to write cheques to offset the hardship of the HST for lower-middle income households, they will do it. They will send us the bill, but they will do it.

The panel report found that, in the short term, families will pay about $1.3 billion more per year in sales taxes. At the same time, businesses will pay about $730 million less per year in sales taxes. So, the HST will collect about $600 million more in revenue than the GST/PST combination, and it causes a shift in taxation from businesses to people. The increased revenue is a real thing, but the shift in taxation is an illusion. The reason is that we know from watching the introduction of the GST in Canada and the HST in the Atlantic provinces, that after a couple of years, firms pass on their tax savings to customers through lower prices. Only firms that do not have to compete for your business will be able to hang on to their tax savings and make greater profits. The panel estimates that such firms are about one-tenth of the economy. Other firms have to compete to keep their customers, and these will pass on the savings to consumers in the form of lower prices.

Fourth, the PST was applied to every transaction of goods, even among firms. Thus, goods that were made of a lot of goods could get taxed more than once under the PST. This means that you paid more PST than you thought under the old system, because you also had to pay the PST that the firm had paid to make the good you bought. In contrast, the HST is a "value-added tax." Firms collect receipts for all the goods and services they buy in the production process, and they get credit for those receipts when they remit to Canada Revenue Agency. This means that the total tax paid for any good or service is exactly the HST rate.

A better kind of tax

All of the above reasons are about the type of tax we want to have, not the rate that we should charge. And the type of tax B.C. will have is what the referendum is about. Regardless of political orientation, it is almost uniformly felt among economists that the type of tax we want is a value-added tax charged on all goods and services except those are explicitly identified as needing social subsidies.

When it comes to the question of what rate to charge, the left should be clamouring for higher rates, not the lower rates (10 per cent instead of 12 per cent) recently promised by the BC Liberals. "We demand a 15 per cent HST!" More public expenditure requires more taxation. All the social expenditures that we want for our families and our children -- more nurses and GPs, smaller classrooms, better universities, more parks, and so on -- need money. The HST is a good way to raise money.

We can offset the HST's effects on low-income households by using refundable tax credits (read: writing them cheques).

So, get on board and vote NO so that we get to keep this awesome tax.  [Tyee]

Read more: Politics

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