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HST wasn’t ‘tax grab,’ study finds. (It sure felt like one)

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What was the impact of the HST? The introduction of the harmonized sales tax in Ontario has bumped up the cost of living by an estimated 0.6 per cent, a new study finds. And when the overall reform package is taken together, concludes Professor Michael Smart of the University of Toronto, the province's HST reform was not a "tax grab."

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The paper released by The School of Public Policy at the University of Calgary is said to be the first to study the true effects of the HST reform.

"With the compensating income tax changes also enacted by the Ontario government, the net impact of the reform for most families by the end of 2010 was a gain or very small loss in after-tax real incomes," according to the U of T professor.

He found that the immediate impact was to raise the cost of living by about 0.9 per cent in July. But by December, when input tax credits had an effect and businesses had time to adjust prices, that dipped to 0.6 per cent.

Prof. Smart not only looked at the overall effects, examining several issues in his thorough paper, but also at the impact on different income groups, finding that the effect at the lower end was "slightly regressive."

On average, he said, low-income families spend a greater proportion of their overall consumption in some of the newly taxed areas.

On average, the estimated change from sales taxes alone was $231 a year for families in the bottom 20 per cent on the income scale, $461 in the middle group, and $726 for the wealthiest, the group that could most easily swallow it. (My words, not his.)

"As expected, the effect is slightly regressive: new taxes represent about 1 per cent of consumption in the bottom quintile, but only 0.8 per cent in the top quintile," according to Prof. Smart.

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But when accompanying income tax changes and other initiatives are factored in, the overall impact is different. For the poorest 20 per cent, there was an average net gain of $375 a year, for the middle a hit of $121 and, for the top group, $208.

"The HST reform was a change in the way we tax, but it wasn't a tax grab, and it did not change people's overall tax bills very much," he said in a statement.

So, if by Prof. Smart's findings the overall impact is small, why such a fuss?

"It is sometimes surprising for economists conversant with the benefits of value-added taxation that such small changes in tax burdens attract so much attention and controversy among the news media and the public," Prof. Smart said (in what I think may be a shot at me and my colleagues who clearly aren't as conversant).

"One likely reason is that HST is in most cases added to bills at the cash register, rather than included in quoted prices. This makes even low rates of sales taxation highly politically salient, even compared to much higher rates of income taxation, since income tax is usually withheld at source and tax returns are filed only annually."

Indeed, Canada appears to be alone among the OECD countries where the tax is usually added at the register, rather than included in quoted prices, he said.

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"Regardless of how it affects pricing, there is little question that many Canadians regard the separate calculation of HST on each transaction every day as an irritant. The estimates in this study may give a better sense of how small that irritant actually is."

Cameco sinks Shares of uranium giant Cameco Corp. continued to decline today, bringing the losses since the earthquake, tsunami and nuclear crisis in Japan to more than 20 per cent. Shares of Uranium One Inc. also continued to fall.

The crisis in Japan has dimmed the outlook for the nuclear sector, although Cameco has said the market reaction is expected to be short term.

As Globe and Mail mining writer Brenda Bouw reports today, fallout from Japan's nuclear catastrophe is spreading across the once-promising uranium industry.

"Even if a meltdown is averted, we believe enough damage to public sentiment has now been done to assume the nuclear renaissance will be dented," Raymond James Ltd. analyst Bart Jaworski wrote in a note to clients yesterday.

Markets mixed Global markets were mixed again today, but rebounded in North America, as investors weighed developments in Japan. Asian markets slumped, European and North American stocks climbed.

Oil prices also rose, as had the yen , whose surge against the U.S. dollar threatens to put added pressure on an already deeply troubled Japanese economy. The yen pulled back somewhat from a postwar high on speculation among traders that officials would intervene in the markets.

As Globe and Mail Asia-Pacific reporter Andy Hoffman writes today, currency traders believe the Japanese government, insurers and other companies will have to repatriate billions of yen invested abroad. And as our Washington correspondent Kevin Carmichael writes, Japan's response to the crisis is likely to drive up U.S. interest rates.

Nexen to slash debt Nexen Inc. plans to slash its debt by up to $1-billion (U.S.) in the wake of a "negative outlook" by Moody's Investors Service.

The Calgary-based energy company said today it plans to issue, before the end of the month, a notice of redemption for all $500-million in 5.05 per cent senior notes due in 2013, and also offer to buy up to $500-million in 5.20 per cent senior notes due in 2015 and 5.65 per cent senior notes due in 2017.

"Last week, Moody's Investors Service announced that it completed its credit review and confirmed Nexen's Baa3 rating, with a negative outlook based on achieving certain debt levels within the next year," Nexen said in a statement.

"We indicated we could meet these levels by reducing our debt by approximately US$1.5-billion. Today, we are announcing actions to reduce up to US$1-billion of our debt from cash on hand."

Inflation up in U.S. Inflationary pressures in the United States may not be as fleeting as the Federal Reserve has suggested.

Consumer prices in the United States climbed 0.5 per cent last month, pushed up by higher food prices and costs at the gas pump. The annual inflation rate is now 2.1 per cent, its highest in 10 months.

The so-called core rate, which strips out volatile items, rose more than projected, by 0.2 per cent, bringing the annual pace to 1.1 per cent.

"Gasoline jumped 4.7 per cent, extending its yearly gain to 19.2 per cent," said senior economist Sal Guatieri of BMO Nesbitt Burns. "If you're thinking of dieting, now's a good time to start: Food and beverage prices leaped 0.5 per cent for the second straight month, and are up 2.2 per cent the past year."

He also noted broader increases in airline fares, medical costs and auto prices.

"We had expected core inflation to average 1.1 per cent this year and 1.3 per cent next year, and to stay below the Fed's presumed price-stability range of 1.6 per cent to 2.0 per cent," Mr. Guatieri added.

"However, this report suggests some modest upward revision is in order, even though high unemployment and modest wage gains should continue to keep a lid on generalized inflation. Still, price pressures might not be as 'transitory' as the Fed believes."

The U.S. central bank will be foreced to be a bit more wary given the latest readings, and, said economist Alistair Bentley of Toronto-Dominion Bank, "careful that higher commodity prices don't feed into inflation expectations and ultimately higher core inflation."

Paul Ashworth, the chief U.S. economist at Capital Economics in Toronto, agreed: "February's U.S. CPI report reveals that food and energy prices are rising rapidly in response to the surge in commodity prices, while the downward trend in core inflation is apparently over."

Foreigners snap up Canadian bonds Foreign investors are loving Canadian bonds.

Non-residents grabbed another $13.3-billion of Canadian securities in January, Statistics Canada reported today, largely because of a continued appetite for bonds.

"Acquisitions of Canadian bonds by foreign investors amounted to $10.1-billion in January, following a record high investment of $95.9-billion in 2010," the statistics gathering agency said.

"Federal government bonds accounted for just over half of this activity in January, largely Government of Canada two-year benchmark bonds."

Foreign investors also took up $1.8-billion in provincial bonds, Statistics Canada said.

"With these inflows enough to easily fund all of Canada's government deficits, it's no wonder that a) the loonie pushed above par to start the year and remains there, and b) long-term government bond yields have stayed below their U.S. counterparts," said BMO Nesbitt Burns deputy chief economist Douglas Porter.

Mr. Porter noted that Japanese investors grabbed $1.1-billion of Canadian bonds in January, bringing their total for the past year to $6.1-billion or 6.3 per cent of all foreign purchases.

By the end of last year, the Japanese held almost $45-billion of Canadian bonds, or 7.8 per cent of the total held by foreigners.

After the Kobe disaster, Japanese investors dumped $1.4-billion of Canadian bonds in the second quarter of 1995, but this time "even large-scale repatriation by Japan of Canadian bonds would likely be readily absorbed by other buyers."

The bottom (line) Lululemon Athletica Inc. today posted solid fourth-quarter results as profit climbed to $54.8-million or 77 cents a share, basic, from $28.5-million or 40 cents a year earlier.

The yoga wear retailer's revenue surged 53 per cent to $245.4-million.

Its stock fell, though, as it warned that sales growth is being hurt by the fact that it can't keep up with surging demand, Globe and Mail retail writer Marina Strauss reports.

This month, product shortfalls are chopping about 20 per cent from same-store sales growth, chief financial officer John Currie estimated during a conference call.

"While we will see some cost pressures in 2011, we are confident in our ability to maintain our business model through disciplined management, operating efficiencies and leverage on higher sales," said chief executive officer Christine Day.

Lululemon projected first-quarter diluted earnings per share of 36 cents to 38 cents, and revenue of $175-million to $180-million. For the year, it forecast diluted earnings per share of $1.90 to $2, and revenue of $885-million to $900-million.

Coke holds top two brands Coca-Cola products now hold the top two spots in soft-drink brand rankings in the United States, knocking rival Pepsi into third spot. And notably, in a report today by Beverage Digest, some diet pop brands are coming on strong.

Coke held a 17-per-cent share of the market in 2010, while Diet Coke came in second at 9.9 per cent. Even though both dropped in sales volume from 2009, Pepsi dropped further, to hold a market share of 9.5 per cent.

The next six spots to round out the top 10 included Mountain Dew, Dr. Pepper, Sprite, Diet Pepsi, Diet Mountain Dew, Diet Dr. Pepper and Fanta. But for Dr. Pepper, all are Coke or Pepsi products.

Diet Mountain Dew and Diet Dr. Pepper saw their sales volumes grow by more than 5 per cent in a generally declining industry.

"With the volume declines of the last six years, the category's volume is back down to about where it was in 1996, eliminating years of growth," Beverage Digest said.

Whither Air Canada? Analysts are beginning to take another look at Air Canada after the airline's announcement late yesterday that it's suspending several unprofitable routes and cutting back on planned seat capacity as fuel costs surge.

Analyst Tasneem Azim of UBS Securities Canada today cut her 12-month price target on Air Canada stock to $3.75 from $4.25, and her estimates for earnings per share this year to 13 cents from 34 cents.

As of May 1, The Globe and Mail's Tara Perkins reports today, the airline is pulling routes it sees as no longer profitable at current levels of fuel costs. Over all, Air Canada will be offering fewer seats that it had planned by slashing routes and the frequency of flights, and by using smaller planes.

"We believe there is downside risk to our estimates from higher fuel costs," Ms. Azim, who has a "buy" rating on the stock, said in a report.

"While [Air Canada] may continue to raise base fares or fuel surcharges to absorb higher fuel costs, in doing so it runs the risk of discouraging demand. The airline will likely consider further capacity adjustments should fuel prices continue to accelerate."

Added Jacob Bout of CIBC World Markets, whose price target is $5.50: "Given the volatility in fuel prices and ongoing macroeconomic undertainty, we believe it is prudent for [Air Canada] to pare down its capacity growth in an effort to maintain its elevated load factor, which is key for [Air Canada] to increase its fares/fuel surcharges to offset rising costs."

Moscow's biggest problem? Forget the Russian mob and other things you may have heard about doing business there. According to the chief executive officer of Goldman Sachs Group Inc., the biggest hurdle to making Moscow a financial centre is ... constant traffic jams.

Deputy Finance Minister Dmitry Pankin told Bloomberg News that at a meeting two days ago between Lloyd Blankfein and President Dmitry Medvedev, the Goldman chief said the biggest problem was a "bottleneck from the airport to the city centre."

Boyd Erman's Morning Meeting It's one thing to talk about an initial public offering. It's another thing to actually pull one off in current markets, Streetwise columnist Boyd Erman reports today.

In Economy Lab today

As an indication of how important the Chinese market is to the future of cinema, it's hard to beat the case of "Red Dawn," Mitch Moxley reports from Beijing.

Amid the "world of worry and swirling events" sweeping the globe, BMO Nesbitt Burns believes three developments in particular demand the most attention, Japan's crisis, oil prices and sovereign debt.

"After a tremendous rebound from the depths of despair two years ago, the global economy and financial markets have been lashed by a series of unfortunate events recently which cast some serious doubt on the strength of the recovery," economists Douglas Porter, Robert Kavcic and Benjamin Reitzes said in a report today.

The economists trimmed their projection of global growth to 3.75 per cent from an earlier 4 per cent.

In Personal Finance today

Despite the risk of rising interest rates, most mortgage brokers still say variable-rate mortgages are the better deal, Rob Carrick reports.

There are various red flags that will alert the watchful taxman to put your return under a microscope, writes tax expert Tim Cestnick. Here are some tips to help you avoid an audit.

Angela Self offers some advice on how to weigh the purchases we want to make today against our goals for the future.

From today's Report on Business

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