Four-tenths of a per cent, the increase that TD Economics predicts in the average consumer-price level as a result of sales-tax harmonization in British Columbia and Ontario, is an acceptable price to pay for greater efficiency and neutrality in Canadian taxation, and greater international competitiveness.
That 0.4 per cent makes a striking contrast to the eight percentage points in Ontario and the seven points in B.C. that will be the provincial portions of the Harmonized Sales Tax. There are several reasons for the apparent discrepancy. For one, businesses in those two large provinces are likely to save $6.9-billion a year, thanks to the HST, according to the TD report written by Don Drummond and Diana Pietramala.
Most of that money will benefit consumers, not because businesses are philanthropic but because they have to compete with each other, and will lower prices in doing so. This is not a naive projection; it is based on the experience from the GST and the HST in the provinces that have already adopted it. Mr. Drummond and Ms. Pietramala estimate that it may take as much as six years for the full savings to be "fed through" to consumers, so there will certainly be some short-term pain.
Retail sales tax in Canadian provinces has been levied predominantly on purchases of tangible goods rather than services, with a confusing array of exemptions for goods. The GST and HST spread the burden more evenly, by including a wide range of services.
The HST, like the GST on its own, is a value-added tax, which means that its effect is to tax the margins at each stage that a product or services passes through, rather than taxing the whole price at each stage, which amounts to multiplied taxation, more graphically known as "tax cascading."
Canada is quite an open economy, and so are British Columbia and Ontario in particular. Because 130 other countries have value-added tax, Canadian-made goods subject to provincial retail sales tax are now offered at a disadvantage to imports from those countries.
Even so, what Mr. Drummond and Ms. Pietramala expect to be a permanent 0.4-per-cent rise in the average Canadian consumer-price level is not pleasant or insignificant. On the other hand, it may be comforting to recall the compensating effect of the Harper government's two-percentage-point reduction in the GST - wrong-headed and justly decried though that was.
Value-added taxes are better for productivity than income taxes, which is all the more reason why, when Canadian governments get their deficits under control again, they should turn their minds to income-tax cuts that would more than outweigh the new HST burden.
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