November 01, 2007

In Search of Harmony

While skimming over the articles at G&M's website, I came across this article. It's a piece that argues in favour of Ontario harmonizing its provincial tax with the GST, similar to what the Maritime provinces already have in place.

The author, Derek DeCloet, bases his argument around the idea that harmonizing Ontario's sales tax with the GST while also providing a corporate tax cut will bring corporate rates down to approximately 16%-17%. This is in comparison to the 24% range that the corporate tax rate will be at if Ontario follows Flaherty's lead in providing a cut. DeCloet argues this will save a lot of money for many of Ontario's businesses that are struggling with the high dollar and many savings will be passed on to the consumers who are paying the 'high' tax rate through a hidden adjustment in the price of goods.

There is an issue with DeCloet's assumption though. You can never assume that the savings are going to be passed on to the consumer. One only has to look at the issue with the increase in the Canadian dollar. The savings were minimal at best and it took a lot of public and media pressure (Flaherty doesn't get any credit because most businesses were addressing public complaints prior to his 'look at me' moment) just to get there. That's not to say there aren't savings to be found but the impact isn't changing much since many Canadian shoppers, especially in Ontario, are still making trips across the border. To assume that a company is going to automatically pass savings on to customers is not an assumption based in reality. Look at the some of the big banks in Canada. Over the last decade the Royal Bank and CIBC were making record profits but still found ways to charge more for services, create new charges and slash jobs. Now they're making even more money. That brings up some serious questions.

Also, there is the issue of Ottawa playing nice with Ontario. It's no secret that Ontario, relative to other provinces, is getting the shaft when it comes to funding. The provincial government and even many Ontarians aren't getting equal treatment when it comes to things such as immigration funding, EI and health care funding. Ontario is contributing a disproportionately high amount of funding to Ottawa in respect to what it gets in return versus other provinces. Harmonizing our tax system with Ottawa again makes the assumption that everything will run smoothly and we'll get all our money back. I do understand that harmonization would work differently from other revenue sharing programs but the with provincial-federal relationship being as fragile as it is, it's probably in our interest to retain control over our own revenues for the time being.

And control has a lot to do with it as well. While Ontario's PST is generally set at 8%, the level actually varies depending on the item being purchased. Notably, there is no tax on children's clothing or books and on food purchases under $4. On the other hand the PST rate on alcohol is 10% and ticketed entertainment is set at 12%. Harmonizing our sales tax with the GST would take away a lot of that flexibility, especially in regards to those items that are exempt for the purpose of assisting people that rely on any savings they can get.

By no means would I consider myself an economist or even up to par on the latest theories. I do understand that the general idea for economists is about creating wealth and harmonizing the sales taxes would help in that regard. However, there is more that goes into a decision than just theory. Common sense and reality have to be taken into account as well and on those concepts, I'm not sold on the idea of harmonizing as of yet.


s.b. said...

Ontario's sales tax does not include services and harmonizing it with the GST would cost Ontario consumers a great deal more, making things such as legal services, chiropractic, tutouring for children, drivers lessons etc much more expensive, 8% more to be exact and that's alot. Care to add 8% to the cost of taking care of a loved ones estate or to your divorce, or to treatment for your back injury???? I don't. It would be terrible to harmonize Ontario's tax with the GST.

Kyle said...

That is something I came upon when I was doing some research on the topic. There was a quote from someone commenting on harmonization in New Brunswick, I think. It was to the effect of, 'I'm glad to see some prices come down, too bad I now have to pay more for other things'.

That would be a real concern for many people and at best would only balance out any alleged savings we might get.

Joanne (True Blue) said...

I agree. I don't see a benefit for the average Ontario consumer here.

Perhaps the benefit is aimed more at the manufacturing sector to help smooth out the effects of the high dollar.

Kyle said...

That is a reasonable assumption. It then comes down to what is of more concern, or which decision has the best positive effect.

Though I do wonder since much of the manufacturing sector's problems are due to low American sales as much as it is the high dollar, if cutting their tax rates dramatically will prevent job losses? If demand isn't there, no matter how much they're saving, is there any reason to keep your work force for a higher production rate?

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