Econ 101 in BC: The HST referendum

In a strange turn of events, British Columbians who have successfully avoided economics classes their entire lives are now being subjected to a typical microeconomics final exam question: Which is better, a traditional sales tax like the old BC PST or a v

In a strange turn of events, British Columbians who have successfully avoided economics classes their entire lives are now being subjected to a typical microeconomics final exam question: Which is better, a traditional sales tax like the old BC PST or a value-added tax like the new Harmonized Sales Tax (HST)?

A mail-in referendum is happening right now. What makes it different from an economics final exam is that voters have more than one professor.

There is an official “No” organization and another for “Yes.” Both are advertising vigorously, even going so far as to put election-style signs along the sides of the Stewart-Cassiar Highway for the benefit of voters in Dease Lake.

There is also an independent panel charged with opining on the choices. And finally, every think tank in Canada seems to have issued a report.

Tax policy is notoriously obscure and complex. In most countries, the choice of sales tax regime is left to the finance ministry and the legislature. This usually results in a tax like the HST, since most economists and tax experts view value-added taxes as much better than archaic sales taxes like the old BC PST. This is why nearly every country in Europe has an HST and not a PST.

It likely would have been the same in BC if the Liberal government in Victoria had not bungled the announcement of the tax, provoking a public backlash. Shortly after former BC premier Gordon Campbell announced the HST plan, one poll showed 82 per cent of British Columbians against it.

Now, new Premier Christy Clark is in damage control mode. To save the HST in the coming vote, she has announced a cut in the HST rate (which includes the five per cent federal GST) to 10 per cent from 12 per cent. She also raised corporate taxes, which is popular since that tax is invisible in the shops.

Meanwhile, disgraced former premier Bill Vander Zalm prowls the province successfully whipping up populist opposition against the HST. Like Vander Zalm, the BC NDP also prefers the old PST. It’s hard to tell if they really think the old PST was so great or if they just see a fine opportunity to attack their political opponents.

But let’s ignore the petty squabbles of politics and dive into the gripping world of tax economics.

The HST’s biggest advantage is that it is, in economist-talk, “non-distortionary.” Except for a few special things like alcohol and tobacco, it is generally harmful to productivity for government taxes to encourage some kinds of economic activity and discourage others. The old PST exempted haircuts, realtor commissions, massage therapy, management consulting and most other services, meaning that furniture makers, sporting goods stores and forestry companies had to carry the province’s tax burden. No one would design a new tax this way.

The PST also hurt exporters, since they had to pay PST on their supplies. This meant their costs were higher when they competed with Alberta or Washington companies. In effect, buyers in other jurisdictions were paying tax to the BC government. Taxing your own exports is not a strategy most countries pursue. The HST, in contrast, gives exporters a credit for the HST they pay on exported goods.

Another HST advantage is that it taxes consumption rather than investment and savings. This is why economists often prefer HST over corporate income taxes and especially taxes on capital. It seems silly to tax the profits of small business investors, and to let the rich in West Vancouver pay no taxes on the architect services for their million-dollar renovation.

A broad HST also attacks income tax evasion, a major issue in a province with such a big drug business. The HST gives grow-op millionaires a chance to contribute to public services in the province. Now they will pay tax on their mega-home purchases and airline tickets, and not just their heat lamps and hydroponic gear.

HST also saves the waste of having two different sales tax bureaucracies.

Finally, the HST is also more socially progressive than the old PST. This is because low-income citizens will get a rebate of up to $320 per year. Not a huge amount, but still better than the PST which had no low-income rebate.

It is of course preferable to have no sales tax at all. But that’s only possible if you have lots of oil money (Alberta and Alaska) or transfer payments (the Yukon). If you do need a sales tax, the HST is far superior to the old PST.

We’ll see if BC voters agree, despite the bungling of their government and the opportunistic posturing of opposition politicians.

Keith Halliday is a Yukon economist and author of the Aurore of the Yukon series of historical children’s adventure novels.

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