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Dalton McGuinty and his Liberal ‘tax grab’

With harmonization Ontario Grits finally get it right – and the Tories don’t like it


 

090413_coyneIn the course of his 5½ years as premier of Ontario, Dalton McGuinty has made any number of missteps, wrong turns, and downright pratfalls. He has raised taxes (when he promised he wouldn’t), ramped up spending at an alarming rate, and repealed rather than obey the province’s balanced budget law. He has handed out hundreds of millions of dollars to failing automakers, picked pointless fights with the feds, and overseen the province’s decline into have-not status.

And through it all, the Progressive Conservative opposition was largely docile. Oh, it would throw out an attack line here, promise to get tough on crime there, but in the broad strokes there was very little to distinguish the Conservatives under John Tory from the McGuinty Liberals, and the whole province knew it. McGuinty’s policies were the Conservatives’ and vice versa.

So what happens when McGuinty, after 5½ long years of unopposed incompetence, finally gets one right—and not just right, but spectacularly, gloriously right, right on a matter of huge importance to the province’s future, right in substance, right in timing, and right in a way that conservatives, if not Conservatives, ought to be cheering to the skies? Ah, that’s the point where the Conservatives decide to stand and fight.

I speak, of course, of the McGuinty government’s recent decision to harmonize the province’s retail sales tax with the federal GST—part of a budget that also promised significant cuts in personal and corporate income tax rates. Not that the budget itself was beyond criticism: spending, already careening out of control, will soar to new heights—an 18 per cent increase in two years—while the de?cit, at $14 billion, steers the province perilously close to the fiscal precipice. But again: of all the things in the budget the now leaderless Conservatives might have attacked, which one did they choose? You guessed it. Sales tax reform.

Launching his campaign for party leader, MPP Tim Hudak, the acknowledged front-runner, vowed to fight harmonization—or in Tory parlance, “this tax grab”—“tooth and nail.” Not far behind, MPP Christine Elliott, his nearest rival, condemned the Liberals for “bringing in this tax now when hard-working Ontarians are having their wallets stretched thin.”

Hmmm. Elliott, Elliott . . . Where have I heard that name before? Ah yes—she’s Jim Flaherty’s wife. That would be Jim Flaherty, the federal finance minister. The Conservative federal finance minister. The Conservative federal finance minister who’s been badgering Ontario these past few years to cut taxes generally (Ontario is “the last place” anyone would want to invest, remember?), and to harmonize the provincial sales tax in particular.

That’s just one of the many ironies in this situation. Swathed though it may be in the usual self-?attering rhetoric, this budget amounts to an abject confession that, indeed, Flaherty was right: with one of the highest marginal effective tax rates on investment of any jurisdiction in the world, according to calculations by the C. D. Howe Institute, Ontario is a comparatively lousy place to invest. After McGuinty’s belated conversion to tax reform, it will be closer to the international average. Yet just as the provincial Liberals are coming around (shame it took a brutal recession to do it, but never mind), the provincial Tories are headed the other way.

In many respects, we are replaying the original fight over the implementation of the GST, more than (sigh) 20 years ago. Then as now, what was being discussed was not a new tax, but the reform of an existing tax. Then as now, the critics’ loudest complaint, that the tax would apply to a broader range of goods and services than before, was in fact one of its strengths: the broader the tax, the fewer the exceptions, the more people make choices based on the real costs and benefits of different products and investments, rather than gaming the tax code.

Then as now, the more legitimate concern, that sales taxes impose a heavier relative burden on the poor, was more than offset by the provision of beefed-up tax credits to low-income households. And then as now, the opposition shamelessly demagogued the issue. It was the federal Liberals then. It’s the Ontario Conservatives now. As, at various times in between, it was also the federal Conservatives and provincial Liberals: each has campaigned against the GST, or its provincial equivalent, when it suited them.

It isn’t as if there’s much division among expert opinion on this. Economists are as unanimous as they can be, not only on the merits of consumption taxes over income tax, but of value-added taxes like the GST over retail sales taxes. Ontario’s current sales tax, because it applies to many (though not all) of the inputs that businesses use, cascades through the various stages of production. Some of this eventually falls upon the consumer, haphazardly. But much of it amounts to a tax on investment: you know, the stuff that makes economies grow.

By eliminating this tax on inputs, via the GST’s familiar system of input credits, the Howe analysts estimate that harmonization alone would cut nearly 11 points off Ontario’s effective tax rate on new investment by 2012. It’s the single most positive thing the province could do to improve its competitive position. But what is that, compared to the delights of shouting “tax grab”?

It isn’t as if the provincial Tories themselves are unaware of this. But they calculate that the voters are too stupid to understand the arguments, and the media too lazy to explain it to them. Damn them for their cynicism, but damn all of us if they’re right.


 

Dalton McGuinty and his Liberal ‘tax grab’

  1. Damn them for their cynicism, but damn all of us if they’re right.

    And yet, amid all the currently popular Mulroney-bashing sport, I have an impression that the country has been dragged to a begrudging realization that the GST was actually very smart policy, and good for the country. Unless I am wildly mistaken, that should count for something as we assess the damnation potential of “all of us.”

  2. In Mr. Coyne’s defense, LFL, this revised taxation has not come into effect yet and won’t until July 2010. So it is inaccurate to say that suddenly businesses and individuals are changing the way they manage their costs.

    However, I am not in favour of this apparent tax grab, even if it is yet to come. It effectively threatens Ontario’s prospects towards economic recovery. Because while the impact of the HST are not yet being felt, they will come July 2010. I think Dalton McGuinty is erring here.

    Money will need to be in the people of Ontario’s pockets for the province to regain its strength, not in provincial coffers to be redistributed ineffectively. Private sector, not public sector, is the motor of our provincial economy and changing taxation is putting a significant limit on its recovery.

    I’m glad that Ontario PC leadership candidate Tim Hudak has been shining the spotlight on this issue. It really isn’t the time to be raising taxes during a recession, which more than likely will still be going on when this tax comes into effect.

    • There is actually a mild stimulative effect of such a tax increase. Any durable goods for which the effective taxation will increase (most notably, new houses) will yield an incentive to buy before the transition occurs, bring demand forward. This might not necessarily be a bad thing.

      Overall, I think the harmonization will only have a slight negative impact. Everyone should remember that this change makes our exporters more competitive, where exports account for a very large proportion of Ontario’s GDP. Even if there is a slight negative impact at first (offset by the one-time transfers of ~$300 – $1000 which will likely result in extra consumption), it is certainly going to help Ontario recover in the long term.

      In other words, stop whining about paying HST on a couple more goods that are not presently taxed. It’s embarrassing.

      • “In other words, stop whining about paying HST on a couple more goods that are not presently taxed. ”

        Andrew (not Coyne) – I have to say first you should really be critizing someone for voicing an opinion. Thats why there is a comment section. Second, taxes do not stimulate and consumption taxes hurt low and middle income Canadians the most. After making a commitment to never raise taxes, Dalton has done that repeatedly.

        This is the worst possible time to be hurting the people of Ontario by taking more money from families that have lost work. That is why I am glad to see a PC Leader like Tim Hudak who says “no more tax increases”. It gets my vote.

    • I never supported McGuinty’s Liberals, but on the strength of this announcement alone, I am ready to join his Party. This is sound public policy.

  3. Home builders think this will be disasterous for the industry. There are two elloquent pieces I’ve come across that take issue with the Harmonized Sales Tax that I would direct your attention to, Mr. Coyne…..

    MCGUINTY’S MOVE A BLATANT TAX GRAB
    NIAGARA FALLS REVIEW

    LAST WEEK’S Ontario budget contains the provision to ‘harmonize’ the Ontario sales tax of eight per cent with the Federal GST of five per cent making a harmonized tax of 13 per cent. This is a serious tax grab by the Ontario government and shows McGuinty’s 2004 promise of “no new taxes” is yet another demonstration of McGuinty’s chronic aversion to telling the truth. I have had dealings with used car salesmen with a better record of honesty and straight talking.

    I looked at my GST payments on heat and light for the past 12 months -a total of $160. McGuinty’s new tax would raise this to more than $400 for an increase of more than $250 per year. My internet service provider tells me it must also charge the proposed higher tax.

    Now, add in the increase for gas, haircuts, home renovations, legal advice and golf fees and you can readily see a tax increase of $500 per year -and McGuinty is going to give us measly $1,000 per household over two years -but we will continue to pay forever.

    McGuinty is creating a massive provincial debt that will take decades to pay off. It’s easy to see why he wants more revenue. However, there is only one place to get the extra money – from the residents of the province.

    If Ontario residents do not reject this harmonization trick disguised as a business efficiency move, then I can already visualize his speech in 2012 or 2013 in which he announces the harmonized rate will increase to 15 per cent. After all, I can hear him saying consumers were paying 15 per cent before the federal government reduced the GST to 13 per cent, so why not push it up again to fill provincial coffers? Hey, lots of other places have a 15 per cent tax, so why not Ontario?

    And if 15 per cent doesn’t get him booted out of office, then by 2015 he will announce an increase to 17 per cent with the simple argument some other countries have a 17 per cent tax, so why not Ontario. The sky is the limit and McGuinty is going to push the envelope to the limit.

    The important point : McGuinty is addicted to high taxes and, like a drug or gambling addict, will say anything and do anything to satisfy his craving.

    After all, McGuinty promised “no new taxes” in 2004 and promptly established the health premium.

    McGuinty promised to shut down all coal-fired power plants by 2007 -guess what, they are still running. Then there are the health-care promises that are leading to hospital service reductions. Now, he comes along with his harmonization trickery, hoping everyone is either asleep or doesn’t understand this new bit of devious sleight of hand. I have to admit, though, McGuinty is an apt pupil of that master trickster Machiavelli, whose policies were characterized by cunning and duplicity. No doubt about it, Machiavelli would be delighted with his pupil’s performance.

    It is time for everyone to tell Kim Craitor we want none of this harmonization nonsense.

    Charles Atkinson
    Niagara Falls

    Ontario’s new harmonized tax will damage individuals and families
    KEVIN GAUDET
    Globe and Mail
    April 14, 2009 at 12:00 AM EDT

    A lot is being made of the Ontario government’s recent decision to combine the provincial sales tax with the federal goods and services tax to create a blended sales tax (BST).

    Taxpayers and consumers have good reason to be concerned with the prospect of another 8 per cent being added to the costs of many services in Ontario. While it might be a good idea in principle, now is the wrong time to impose the BST and Ontario Premier Dalton McGuinty is going about it the wrong way.

    To understand consumer backlash over the BST one must recognize the political and economic climate into which it is being introduced.

    Appreciating this makes it easier to understand why Ontarians simply don’t believe the Premier when he tells them the BST will be good for them.

    First, the politics are bad. Mr. McGuinty has a terrible track record on taxes.

    He has promised not once, but twice, without ambiguity, that he would not raise taxes. Taxpayers are understandably wary because after his first “no new taxes” election campaign promise, he proceeded to hike business taxes and impose a new “health tax” – the single largest tax hike in Ontario history. As well, he gave new taxing powers to the City of Toronto.

    Since his second election campaign, which also featured another “no new taxes” promise, he has put in place a paint tax, an electronics tax and a new tire tax. As well, his Green Energy Act has a new energy tax and a home-sale audit fee. And there’s more: the recently tabled budget raises taxes for the top two tax brackets by lowering the threshold on which they apply, amounting to a large tax grab from the middle class.

    The theory behind the new BST, as argued by the Ontario Chamber of Commerce, is that businesses will enjoy reduced net taxes on many key inputs. Further, that the BST will attract new businesses to Ontario and allow for reduced prices for goods sold. As well, businesses will see lower costs for tax compliance.

    There are a few problems with this. Many of the goods sold in Ontario are for export and the price reduction, if it exists at all, won’t be enjoyed in Ontario but by external markets. As well, a C.D. Howe Institute report indicates there will be a negative GDP impact for years before it turns positive. Even the Chamber of Commerce report indicates consumers likely won’t see costs fully reduced for at least three years.

    The economy is still struggling; people are worried about their jobs and are spending less. Now is the wrong time to add 8 per cent to the costs of gasoline, diesel, propane, home-heating fuel, home electricity, natural gas, home TV service, home Internet service, home phone service, cellphone charges, hair cuts, lawyers’ fees, accountants’ fees, mechanics’ fees, ballet lessons, rink rental fees, tailoring, magazine subscriptions, mutual fund fees, massage, chiropractic, audiology, train fares, plane fares, taxi fares, bus fares, vitamins, dry cleaning, grass cutting, snow removal, camping fees, firewood, meals under $4, new homes over $500,000, gym fees, home renovation labour, and real Christmas trees.

    These newly taxed services will importantly increase the cost of living for individuals and families in Ontario. Mr. McGuinty will pay families $1,000 to offset the new costs. There will also be a new low-income tax credit created. The “McGuinty Bucks” $1,000 cash is one-time, likely won’t cover the tax hikes and appears politically motivated with cheques set to arrive just prior to the next election.

    When most of Atlantic Canada harmonized sales taxes they reduced the rate. Mr. McGuinty is not offering this. An even more meaningful approach to offsetting the pain, instead of McGuinty Bucks, would be to raise the basic personal tax exemption high enough to offset the cost increases. This way the new tax would be cost neutral overall for most people. Instead, Mr. McGuinty’s approach to implementation has been to provide modest relief for the poorest, while punishing those in middle and upper income brackets the most.

    It can’t be denied there are a handful of benefits associated with harmonizing the PST with the GST. Yet, by hitting families in their pocketbook while attempting only to offset the tax grab with a one-time cheque, this approach to imposing the BST will damage individuals and families when they can least afford it. There are other ways to reduce taxes for business that don’t harm individuals and families. Those changes should be undertaken first. That is why some are referring to the BST as the new BS Tax.

    Kevin Gaudet is Ontario director of the Canadian Taxpayers Federation.

    • The addition of 8% tax to the fees charged by Trustees of inheritances which will be received by many “Baby Boomers” from the estates of their forefathers over the next 20 years will alone be a significant reduction in the pockets of Ontario residents.

    • the wsib of ontario are the biggest crooks in the government we got

  4. But Nathalie, even the most optimistic economists think we’re in this recession until at least the end of ’09, which means that Dalton “Tax Machine” McGuinty’s new tax hike (which he said he wouldn’t do) will be going into effect just as we might be coming out of this downturn. Andrew Coyne is incorrect that the Fiberals got the timing right on this one.

    • Anyone who uses playground pejoratives like FIberal or CONservative loses credibility. If you want people to take you seriously, leaving them out will help your cause.

  5. Dear Andrew Coyne,

    I read your article with great interest and I hope to get a direct response to this question from you. I must say I don’t agree with your position on this issue, but rather then saying that you are “in the media, and media is pro liberal” I would like to understand your position better. Please explain why: “It’s the single most positive thing the province could do to improve its competitive position.”

    I own a small company and we are in manufacturing in a very competitive field. Can you please give me some pointers as to why “this is the most positive thing” to do as you do not provide an actual explanation.

    Best Regards, Hans

  6. It’s worth remembering that the promise not to raise taxes was made before it became apparent that Flaherty was cooking the Harris books to hide deficits.

    • That doesn’t quite wash. Before McGuinty made the promise, he criticized the PCs for their hidden deficit. Perhaps he didn’t know the exact scale, but he knew that there was a deficit.

  7. To be fair, this tax increase will not take force for another 15 or so months, and forecasts indicate that we should be in recovery by then. Also, an increase in consumption tax would tend to encourage people to spend before the hike, moving consumption forward on durable goods (like new houses). Furthermore, the cuts in income and corporate tax will be great for stimulating investment, which is really what is needed here.

  8. Andrew,

    From a business standpoint, harmonization makes sense. I get it. Less paperwork, easier to administer, etc. It also allows business to use the additional taxes as an input tax which nets out and the end of the day with what they charge. So far so good.

    But its the effect on consumers that has me puzzled. You say consumption tax is a better tax then an income tax. Fine. But to now pay tax on Rent, food? This makes no sense. From a moral standpoint, it just seems punitive. I’m all for tax reform. But this is reform stamped on a sledge hammer.

    RST is different than the FST of 1991. FST was charged on everything, no exemptions while RST is exempt for any company using the goods for either resale or in the manufacture of a product. So for business, this is a wash out. No effect. For the people, it’s just a big bad tax grab.

  9. “Some of this eventually falls upon the consumer, haphazardly. But much of it amounts to a tax on investment: you know, the stuff that makes economies grow.”

    It doesn’t matter who you tax or how you tax. All taxes hamper the market.

    It’s obvious to you that taxing corporate profits kills investment but why do you think that taxing consumers and workers doesn’t? If you tax consumption it makes buying products more expensive and this reduces demand, which reduces revenues and profits. If you tax workers it means that it is less profitable for them to work for you, which means that you must pay them more, which increases expenses, which reduces profits.

    What you have to get straight, is whether or not government services should exist. If they should exist, it means that you think that the public is somehow intellectually or morally incapable of providing these services in the free market. If you think that they are incapable, then you must answer these questions.

    (1) What is the nature of this intellectual or moral defect, which makes the public capable of certain tasks (getting a job, buying and insuring a car, going to the dentist), but incapable of performing other tasks? (educating their children, paying for doctor visits) Or, is the distinction between these two spheres arbitrary and therefore utterly baseless.

    (2) How is it that the people to whom you would delegate these tasks, the ones which cannot be left to the private and voluntary free market, are free of the intellectual and moral defects to which the general public is prone? Are they of superior genetic stock? Since you’re giving them a coercive monopoly over certain aspects of the lives of other people, how do ensure that they will not be corrupted by the power they hold, and abuse it for their own advantage?

    (3) If you think that the public, defective though they are, are capable of selecting and controlling the people who run these monopolies through elections, they why must there be a monopoly at all? Why can’t the public select people to serve them individually and voluntarily, and change them whenever they want, instead of every four years, with no direct choice of service providers or type of service plan?

    • Absolutely, it is consumer confidence / consumer spending that always staves off downturns and drags us from the wreckage of recession after our political / financial 'captains' steer us straight into an economic iceberg. Of course they
      saw it on the horizon for months, but were unwilling to use the mechanisms, influence, authority, regulations & common sense to take the necessary steps to change course. Full steam ahead in unfettered commerce, that is what
      we had & the global market meltdown is the result. Only a strong, wise government with the foresight to act in the long
      term interests of sustainable growth can make sure all sectors perfom in concert. Anti-government administrations of the day were weak, handcuffed by shortsighted ideology & compromised by self interest. A recipe for disaster.
      To jeopardize disposable income that's been pushed to the tipping point already with this blended tax, this b.s.
      tax in a broad stroke on everything as proposed, will curtail consumer spending, slow growth, and hurt more than it helps business at the till. Sticker shock , No total shock Yes Total deterrent from shopping. Period.

  10. Coyne is right. This is virtually the only thing the Guint has ever done right.

  11. Come on people, surely most of you are bright enough to see what this really is. After failing at numerous attempts to solicit the public’s cooperation in stemming the underground cash economy, the otherwise political foes have gotten into bed together to trick us. First the Feds created the “home renovation tax credit” as a supposed stimulus measure, but then they praise their political enemies for harmonizing the taxes and applying PST on home renovations. I get it….. give a grant and claw it back. Once everyone submits the invoices for the renovations, to receive their tax credit, the government will have complete records of who is out there operating as a contractor and exactly how much business they did. The harmonization kicks-in in July 2010. Hey wait a second…… that’s the same date that the new WSIB anti-underground economy plan takes hold. Well I’ll be dipped in doo-doo !!!! Once the tax credit period is over and the harmonization and WSIB scam are in force, a current $10,000 reno will cost $12,000. That’s the tax increases alone, without any increase on the part of the vendor or even inflation. I believe high pressure sales practitioners call that a “stroke and punch” combination. Canadians are a bunch of naive weaklings, who get tricked and scammed every time. That does it, I’m writing a letter to the Star. I’ll show those guys….. Yea right pal….sit down and shut up !!!

  12. Well, the only question is are the Tories serious about this or not. Are they SERIOUSLY going to repeal this if elected? Are they SERIOUSLY going to make this an election platform issue? And am I SERIOUSLY going to have to either not vote, or vote for McGuinty and not be able to look in the mirror for the next 4 years? OR…. do the Tories just see this as a very convenient way to beat up on McGuinty, by going after the stupid-vote?

    Anyway, McGuinty finally got one right. Hooray! As they say, even a blind squirrel finds a nut once in a while. And on a final note, I don’t think he got it spectacularly right, but he did get it right. Spectacularly right would have been to reduce the HST to the level that it would not take in more revenue than the PST at 8% did (perhaps 7%?). If the Tories want to get this spectacularly right, they should stick with the HST, but make it revenue neutral to the old tax.

  13. I fail to see how slappping a $52,000 tax on a $400,000 house is good economic policy.

  14. this will be the demise of the liberal party in ontario, no more tax grabs, people just can not afford it.
    SHAME ON THE LIBERALS, I HOPE YOU GET OUSTED

    • THATS EXACTLY WHAT WILL HAPPEN, LIBERALS ARE DONE, PEOPLE ARE OUTRAGED

  15. I to am tired of politicians saying they "promise not to raise taxes", or " the gst is temporary and going to pay down the national debt" and then doing what ever they want. An election vote is given in good faith to a politician based on a verbal contract. If he deviates from that, we need a new vote. He is contractually in default.
    We must not let them do what ever they want, we must fight back. We run the government, we pay their salaries and it is time they remember that.

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