Economic Impact of a Harmonized Sales Tax in Ontario and British Columbia

Question

Report Guidelines
Students are required to do reports on five different issues. The purpose of the guidelines is to provide a concise style guide for your reports. For a more thorough reference authority, students can use the Publication Manual of the American Psychological Association which is available in the library. Your reports should begin with an introduction which contains a clear and complete statement of the purpose of the study.
Writing: Even professional writers go through several stages before their work appears in print: pre-writing which entails organizing and outlining what you want to say; expressing your ideas in your best language; and rewriting. Have you ever wondered why Kenneth Galbraith is so convincing and easy to read; he merely rewrites his papers eight times.
Documentation: It is extremely important that the work is done by others be acknowledged. Failure to do so constitutes plagiarism for which the penalties are severe (see Brock University 2010/11 Undergraduate Calendar, VII Academic Misconduct).
The method of documentation to be used in this course is Parenthetical Documentation (as opposed to the Footnoting Method). Your textbook uses this method. When referring to an author, simply state the last name(s) and the year of publication in parenthesis. All the references cited then appear in an alphabetical list at the end entitled References.
Examples of Parenthetical Documentation (APA): When a work has more than two authors, cite all the authors the first time the reference occurs and thereafter use only the surname of the first author followed by et al. and the year. For example,
1. Cyr, Kushner, Kusy and Ogwang (2010), using snowfall data for a typical Canadian city, conclude that weather derivatives can be effectively used to hedge against the financial risks in snowfall removal expenditures.
2. The methodology in this paper is taken from Cyr et al. (2010).
When a work has two (or fewer) authors, cite both names each time you make reference to them. For example,
Kushner and Siegel (2005) conclude that despite the significant reduction in elected officials the cost savings were insignificant.
Direct Quotations: Short quotations are incorporated into the text proper and set off with quotation marks. Longer quotations of more than three lines are single-spaced, indented and without quotation marks. For example,
1. In discussing the normative approach to public policy analysis, Brander (2006,p.2) argues that “Conceptions of the
public interest are reflections of basic values and vary over time and across ethnic, social, and even occupational groups.”
2. In discussing the normative approach to public policy analysis, Brander (2006, p.2) argues that:
Conceptions of the public interest are reflections of basic values and vary over time and across ethnic, social, and even occupational groups. Nevertheless, there is a well-established set of goals that are widely accepted as legitimate objects of government attention.
References:
Bank of Canada (1999) “Selected Historical Canadian-Dollar Interest Rates” http://www.bank-banque-canada.ca/english/sel_hist.html
Cyr, Don, Joseph Kushner, Martin Kusy and TomsonOgwang (2010), “Over-the-Counter Weather Derivatives as a Snowfall Risk Management Tool for Municipalities” Municipal Finance Journal, Volume 31, Number 01, Spring, pp.61-81(21).
Harris, R. (1999) “Determinants of Canadian Productivity Growth: Issues and Prospects” Discussion Paper #8 of Micro-Economic Policy Analysis Branch, Industry Canada. http://strategis.ic.gc.ca/SSG/ra01736e.html
Kushner, Joseph and David Siegel (2005), “Are Services Delivered More Efficiently after Municipal Amalgamations?” Canadian Public Administration / Administration Publique du Canada, Volume 48, No.2 (Summer 2005), pp.251-67.
Economics 2P54 – 2010 Winter Term
Report 1: The Economic Impact of a Harmonized Sales Tax
The harmonized sales tax which was recently introduced in Ontario and British Columbia has been very controversial. The Minister of Finance for the province of Pottsville has directed you as chief economist to report on the desirability of combining the 8 percent provincial sales tax (PST) and the federal 5 percent federal sales tax (FST) into a 13 percent harmonized sales tax (HST). The economic conditions in Pottsville are virtually identical to Ontario’s.
The Minister is a busy individual and becomes very irritable if the report is not precise and contains non-value added rhetoric statements. Diagrams are not necessary and should be avoided when words will do.
Your report must not be more than two pages (1.5 spacing) and must follow the Report Guidelines previously handed out. You must also use at least three references.
Reference hint:
Drummond, Don (2008) “ Time for a Vision of Ontario’s Economy”. T D Bank, September 29, 2008, pp.1-25.

Answer

Name

Institution

The Economic Impact of a Harmonized Sales Tax in Ontario and British Columbia

There are three main economic implications of the harmonized Sales Tax in Ontario and British Columbia. First, the cost of savings in different firms will shift to consumers. Secondly, the tax burden will also shift to the consumer. Thirdly, mitigating factors will be needed in order for prices of new homes valued for less than $500,000 to drop. This last impact has generated the greatest controversy since the introduction of the Harmonized Sales Tax.

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In terms of cost savings, the business will no longer be able to pocket $6.9 billion in the form of savings. Rather, they will be forced by competitive pressures to pass along this bulk of savings to consumers through lowering of prices. However, for the tax to be revenue-neutral for governments, the tax burden will have to shift to consumers, whereby it will apply to a wide range of goods and services. In other words, the policy will have a positive, lasting impact on consumer prices, but this impact will not be as high as many people fear.

The resulting reduction in prices will not be sufficient to offset fully the continued rise in effective tax rate on average consumption patterns. The net effect of this tax will be a permanent increase in consumer price index by 0.7% in British Columbia and Ontario. Additionally, Canada’s average consumer price level will increase by 0.4% annually relative to places where there is no harmonization.

Majority of small and large businesses in B.C and Ontario will derive benefits from harmonization through cut-backs on taxes paid on business investment, inputs, and compliance costs totaling $650 million annually. The tax change from RST to HST favors the open economies of these two provinces, which have been operating in international from a point of disadvantage for many years, because of competitive pressures imposed by RST. Exporters will derive a competitive edge because of the tax change, a measure that will spur an increase in business investment, income growth and employment. Businesses that are emerging from the recession lean will be favored by the tax policy, which will ensure that they are ready to compete.

When the burden of tax shifts to consumers, the effective tax rate on total consumption will increase in average terms. The tax savings for businesses often take the form of lost revenue for the B.C and Ontario governments. Therefore, the tax revenue that is needed for supporting schools, hospitals and social programs tends to be sourced from elsewhere. In this case, it is expected to be generated by increasing the tax burden on all consumers. Although consumers will be paying lower pre-tax prices, they will be forced to pay the newly imposed flat HST on a wider range of goods and services than ever before.

The controversy over new housing arises from the fact that under harmonization, an additional 7% will be levied in B.C and 8% tax will be levied in Ontario. This will result in an increase in the cost of buying a new home. It will also lead to increase the prices of existing homes. This is because demand will shift towards the resale market, since homebuyers will attempt to avoid paying the newly imposed tax. The impact of the drastic tax changes will show up through the average mortgage interest component of consumer price index. The increase in the principal required to own a home means consumers will may much higher interest payments than before.

References

TD Economics Special Report (2009) The Impact Of Sales Tax Harmonization In Ontario And B.C. On Canadian Inflation, retrieved from http://www.td.com/economics/special/dp0909_hst.pdf  on September 25, 2010.

Smart, M. & Bird, R. (2009) The Economic Incidence of Replacing a Retail Sales Tax with a Value-Added Tax: Evidence from Canadian Experience, Canadian Public Policy, 35(1), 85-97.

Mintz, J. & Smart, M. (2004) Income shifting, investment, and tax competition: theory and evidence from provincial taxation in Canada, Journal of Public Economics, 88(6), 1149-1168