The demise of the HST (II)

by Aaron Wherry

Frances Woolley considers the merits of stealth taxation.

The federal GST or goods and services tax is a case in point. The GST is a value added tax. It replaced a particularly dysfunctional (small base, high rate) manufacturer’s sales tax. Almost all economists considered the GST superior to the old sales tax. However it was extremely unpopular among the general public. The reason is simple: the old manufacturer’s sales tax was invisible, so people couldn’t tell how much they were gaining when it was eliminated. The GST was visible, so people could see the increase in their tax liabilities. As a result, they over-estimated the net impact of the GST on their tax liabilities. (To be fair, people weren’t entirely stupid: manufacturers were slow to pass on the tax savings created by the elimination of the manufacturer’s sales tax.)

Rosen et al argue that “Most economists view the visibility of the GST [goods and services tax] as one of its beneficial characteristics.”  The political opposition to the GST and now the HST (harmonized sales tax) should make “most economists” reconsider this view.




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The demise of the HST (II)

  1. I think visible/hidden tax preferences are based on opinion of Government. I would prefer all taxes be visible so people can see how much we pay for incompetent governance while people who want hidden taxes prefer to bamboozle people. 

    I would also prefer it if no taxes were charged/paid throughout year but everyone is forced to write one cheque to government at end of year to pay for next year’s services. It would be good to have system where people are required to save their own money and at end of year they have to hand it over to Government. 

    Psychology of paying taxes would change drastically, that’s for sure.

    • You didn’t understand a word she wrote. Pity.

      • You’re assuming he read any of them.

  2. It’s a sad commentary on our society that govt has to sneak things through, even though voters claim they want openness and accountibility and to be told the truth.

    Nobody wants to face adult realities.

    • I’d counter that the problem with the GST was precisely the opposite. The GST itself was apparent, but not the tax relief for manufacturers.

      Not only did they pocket the savings as a windfall, the manufacturing sector subsequently reduced their investment in research and development and invested in foreign production at the expense of Canadian jobs. To be sure the GST didn’t cause that, but what benefit did Canadians reap? I just see more taxes, fewer jobs and and a manufacturing sector that failed to become more efficient and remained dependent on the low exchange rate for the CDN dollar.

      • Govts have to ‘prep’ the electorate for changes, but we’ve had some major failures in that area.  Trudeau didn’t properly prep the public for Metric, and Mulroney didn’t properly prep the public for the GST.

        The GST was lower than the MST, and spread out over more things….with the usual exemptions of course. It was revenue neutral….but it was visible so Canadians were now aware of a tax they’d been paying all along. Mulroney thought it was a good thing to be aware of taxes you’re paying….Canadians didn’t like it however. Ignorance is bliss I guess.

        Any benefit to manufacturing…including Harper’s beloved corporate tax cuts…. goes to company profits and shareholders….it does not go to new hiring.

        Going overseas was inevitable though, even if the MST/GST never existed.

        Manufacturing, for the most part, is low or unskilled work…and it’s cheaper overseas.

  3. “(To be fair, people weren’t entirely stupid: manufacturers were slow to pass on the tax savings created by the elimination of the manufacturer’s sales tax.)”

    Has it ever been shown that manufacturers actually did eventually pass on the savings?

  4. I’m starting to think that it’s the economists that are simple, or perhaps just too stubborn to recognize that the way these taxes are introduced is extremely important and that’s what Canadians reacted to in the case of the GST.

    It virtually raised the cost of living by 7% as manufacturers passed along the tax but not the savings. People spending money notice if restaurant meals or books or newspapers or coffee go down in price, and they just didn’t, no matter how many economists turn blue in the face and stamp their feet.

    • Part of the problem is that economists (and libertarians) seem to operate under two primary flaws:

      1.  People have access to perfect information.
      2.  People react quickly to new information.

      I suggest that half the reason that many companies didn’t pass on the savings is that they really didn’t know what those savings would be.  Small businesses especially typically aren’t being run by accountants. They’re being run by the guys who like what they’re producing. And those folks know that they have to charge X to get a profit.  Suddenly changing the tax structure isn’t going to change that “knowledge” they have.  That takes a couple of quarters or so when they see their profit increasing.  And of course by then they’ve already got plans for that extra profit, expansion or whatever, so can’t lower their price anyway. Not that it matters since their competition was doing the same thing.

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