That the HST will take a bite out of family budgets is clear to everyone. The main question right now is just how big of a bite.
Two studies released earlier this week asked this exact question but came to very different conclusions.
On Monday, the Fraser Institute released a paper arguing that lower and middle income families will be better off under the HST (because of the low income tax credits), while the average family will only pay $44 extra per year under the new tax net of the tax credits. They conclude that the impact of HST on family budgets will be negligible.
The very next day, the Victoria Times Colonist reported that this same average BC household stands to pay $521 more as a result of the tax (see HST will hit some hard: Analysis). These were the findings of a simulation the newspaper commissioned from Statistics Canada.
Now, they can’t both be right, so which one is it?
We’ll have to take a closer look at the way they did the calculations to find out — a classic example of the devil in the details.
Digging into the how of the calculations may seem cumbersome and it makes for lengthy blog posts (be warned!), but it’s the only way to move beyond the he said, she said game that often plays out in the media and understand what’s really going on.
Curiously, both reports start off using with the same tool — Statistics Canada’s social policy simulation database and model (SPSD/M) — the state of the art model that’s used by the federal government (and other researchers) to estimate the costs of proposed changes to the tax system.
The key seems to be in how exactly the researchers model the passing through of savings from business to consumers.
The Fraser Institute is vague about their methodology, basing their calculations on “the Fraser Institute’s Canadian Tax Simulator,” which is developed in house by Institute analysts on the basis of the SPSD/M. Their brief methodology paragraph provides the following explanation:
We use the SPSD/M to calculate a distribution series for each specific type of tax and income. For example, we calculate the amounts of provincial personal income tax paid by each family as a share of the total provincial personal income tax collected. We then use the distribution series to distribute the 2011 and 2012 tax revenue figures forecasted in the provincial and federal budgets to the individual families.
In other words, they start off with the BC government’s own estimate of how much more tax they will collect as a result of the HST and divvy up the extra among households based on what share of the BC sales tax pie they paid last year. No wonder the average household comes out paying so little extra under the HST: the BC government estimates that they will only collect about $410 million more in sales tax.
$2 billion in savings to business gets offset by households paying HST on goods and services that were not subject to the PST before and the Fraser Institute’s calculation assumes not only that 100% of the savings is passed on in the first year of the HST but also that the savings are distributed among households exactly in proportion to the amount of PST they paid last year. These are both highly questionable.
The Victoria Times Colonist enlisted Statistics Canada to run a simulation using the SPSD/M to look at the effects of HST on 15 different household types and 15 different income classifications. They find that the tax change could range in net costs anywhere from $78 for households with single parents and one child to $801 for a married couple with no children (see table).
The SPSD/M by definition assumes that all consumption taxes are passed on to households, but these calculations are obviously passing the savings differently, because they project that households will pay $1.5 billion more in commodity taxes and that excludes higher taxes to be paid on new housing.
This is because the analysts look at the impact of the tax on personal expenditures for households in BC and there are considerable savings for business as a result of the HST that do not accrue to industries producing items of personal expenditures.
Exporters, for one, will realize big savings from HST that will not be passed on to BC consumers. The construction industry will benefit considerably as well, and households are not the final consumers of construction output so they won’t be the ones realizing the savings (arguably, a limitation of the SPSD/M is that it cannot account for household spending on new housing, where we may see some pass-through of savings, though as a current renter I’m not holding my breath).
Given that the biggest business savings as a result of introducing the HST in BC will be realized by forestry, mining, oil and gas, construction and manufacturing — all sectors producing goods that BC households do not directly purchase — it’s no surprise that households will face an extra $1.5 billion in HST on personal expenditures.
This is the main difference in calculation used in the two reports and it explains why they come up with such different impacts for the average households. The Times Colonist/Statistics Canada method captures the tax outlay of British Columbians in a more realistic way than the Fraser Institute calculation, so their findings are likely closer to the true impact of HST on the average households.
Interestingly, the two reports work with different definitions of the BC family. The Fraser Institute only considers families of 2 or more people, leaving out of their analysis almost 1/3 of BC households that are made up of unattached individuals, some of whom — unattached elderly, for example — would likely take quite a hit as a result of the HST. The Times Colonist analysis includes unattached individuals in their definition of households.
What makes the Times Colonist/Statistics Canada calculation much more helpful is that they examine the impact of HST on families of different composition and different income levels separately.
This is important because in reality there is no such thing as the average family — it’s an abstract mathematical construct that doesn’t represent anybody’s experience — and using only averages glosses over potentially large distributional differences in the impact of the tax.
Calculating the average among all families produces particularly meaningless results when we’re dealing with an income-tested benefit, such as the HST low income tax credit. On average, however, BC households will get $147 (the total value of the credit divided by the number of households in BC). This means nothing in practice, as 1.1 million British Columbians are slated to receive some amount of the credit, according to government calculations, while the remaining over 3 million people will not.
The Times Colonist/Statistics Canada reveals large distributional differences in the impact of HST with single parents getting off lightly with an extra cost of only $78 on average, while married senior couples can expect to pay $639 more. Married couples with no children would pay the most, $801 extra on average. While this group tends to be among the higher income families so their HST bill does not necessarily present a public policy problem, claims that the HST won’t take a bite of family budgets in BC simply do not hold up to careful scrutiny.
The government should reconsider the structure of the HST low income credit to ensure that vulnerable households such as seniors and modest-income families with children are not pushed into poverty as a result of the new tax, especially at the heels of a painful recession when unemployment rates remain high (currently 7.5%).
Delilah Langtved // Sep 14, 2010 at 12:45 pm
People shop at second hand clothing stores because they can’t afford new clothes. I was just totally discusted when I found out HST is charged on used clothing. This government doesn’t seem to care about the poor obviously.
Iglika Ivanova // Jul 5, 2010 at 11:19 am
Bill, here are the answers to your first two questions. You may also be interested in my next HST blog post for a complete picture of my view on the HST.
A. Cascading taxes – yes, the PST “cascaded” through the production line. Provincial governments tried to remedy this by exempting a large number of goods that were clearly used for production from PST. Most machinery and equipment used in manufacturing was exempt, for example, so the cascading tax was not as big of an issue as the government would like you to believe.
Look at the tax savings that export-oriented industries in BC are expected to realize (according to the governments’ website): $320 million total for forestry, manufacturing, mining, oil and gas, compared to $880 million for construction only:
* Forestry – $140 million
* Mining, oil and gas – $80 million
* Transportation – $210 million
* Construction – $880 million
* Manufacturing – $140 million
It seems clear that the current PST exemptions greatly minimized the cascading impact of the tax for exporters, but they presented more of a cost to construction and transportation industries.
Does a cascading tax harms business or the economy? It depends on what you believe about the world of business. Can business pass all its costs to consumers without a loss in sales? If so, then it doesn’t matter how high your cascading tax is, it won’t harm business. Similarly, if business can pass its costs back to labour (through lower wages), the same thing would be true – no harm done.
Businesses selling to the domestic market should be able to pass the tax on consumers (as all local businesses have to pay the cascading tax, so they all have similar cost structures), but exporters would be harder hit because they compete directly with producers from jurisdictions where there is no cascading sales tax, so the PST inflates their production costs.
Now with the value-added method of taxation businesses would be able to claim the tax back for business inputs like office furniture, computers, etc. How much would that impact the bottom line? I don’t anticipate a rush to invest in BC as a result of the HST, but we’ll have to wait and see.
B. Exporters and their impact on the economy
Exports play a big role in BC’s economy, and we account for about 8% of Canada’s exports (according to BC Stats). While export growth certainly translates in GDP increases, exports are not much of a direct job creator. Most of our exports involve exporting raw materials with very little value added manufacturing on top. So we basically cut the trees or dig stuff out of the ground and sell it. Which makes for very capital-intensive, but low-labour industries. That said, workers in export sectors earn above average wages, so these are decent jobs. However, there aren’t that many of them.
And this doesn’t even begin to touch on the environmental impacts of our extraction exporting industries. Which, I think, is the main reason to seriously reconsider how these industries operate.
On that note, I’d like to emphasize that the only empirical study on the HST implementation in the Atlantic provinces, the one done by Prof Michael Smart, only studied the impact on HST on business investment NOT on jobs. While I agree that we’ll see an increase in business investment and quite likely a GDP boost, I don’t think we will see job growth of the magnitude the government predicts.
If you believe in trickle-down theory, you’d be ok with that as the benefits accrued to the owners of capital should be passed on in the form of higher wages for workers, etc etc.
However, my recent work on poverty and income inequality in Canada has convinced me that a boost in GDP does not necessarily translate in a boost in incomes for most households. In fact, over the last two decades we’ve seen significant GDP growth while the income of the bottom 60% of Canadian families has barely kept pace with inflation.
This is why my assessment of the HST is more nuanced. I am for value-added taxation, I think it is a better way of taxing consumption than PST. But I think that we should be mindful of implementation problems and of the impact the tax will have on modest income British Columbians.
I see no benefit in trying to pretend that the tax will not impact family budgets, as the Fraser Institute reports suggests. We may disagree on what the benefits of the tax would be to the economy or on whether the economic benefits justify the personal costs, but let’s be honest about the fact that people will pay more under the HST.
Iglika Ivanova // Jul 5, 2010 at 10:30 am
Thanks for all the comments.
Bill, I will address your questions A and B in a separate post (I started out here, but it ended up being too long). On your question C, the analysis was done at Statistics Canada by Statistics Canada analysts. I’m not sure if they were economists or statisticians by training, but they certainly were familiar with the model and trained in using it.
The newspaper commissioned the research – they asked the question and Statistics Canada answered it.
Retired 2009, the HST low income tax credit is refundable, which means that if you owe money in tax, it’s a deduction off your bill but if you don’t owe taxes then you get the credit amount refunded from the government. The GST credit works the same way. Which is why you should consider filing taxes even if you don’t owe any money – perhaps the government owes you!
Refundable tax credits became quite prominent in the mid-1990s, as more and more programs delivered subsidies through the tax system. As a result, the percentage of low-income filers increased significantly after the mid-1990s and now almost all households file tax returns. Which makes the tax data an excellent data source for research on income inequality, but that’s another story.
Clicknoise » Blog Archive » Why the HST is a Labour Issue // Jul 1, 2010 at 12:30 pm
[...] has thus far pivoted mainly around two stories: (1) impact of the HST on consumer household costs (mindless media tropes debunked here) and (2) the businesses who will enjoy reduced administrative costs (this blog post casts some [...]
Retired 2009 // Jul 1, 2010 at 9:17 am
I always hear about these tax credits. They have no meaning to me as I haven’t paid income taxes for over 5 years, my income is too low. In other words I get hit with the whole works while trying to make ends meet on retirement pay. I have already cut down to one meal a day but this government appears to want me to give them this meal also. As for the Fraser Institute, it is a corporate think tank and has nothing to do with the economy except in the benefit of the corporations.
Bill // Jul 1, 2010 at 6:48 am
Can you speak to:
A. The impact of the current cascading (tax on tax) regime and how it is impacting the BC economy?
B. Do exports not have a greater impact on our economy in terms of job creation and growth?
C. I understand they used stats can numbers and tools but do you know if the referenced Times Colonist study was completed by economists or newspaper reporters?
Thanks,
Aldyen Donnelly // Jun 28, 2010 at 3:19 pm
Thanks, Iglika.
Unfotunately, restructuring a tax rebate to “ensure that vulnerable households such as seniors and modest-income families with children are not pushed into poverty as a result of the new tax” is easier said than done.
I encourage you to read and think about a report that is updated annually in the UK called “The effects of taxes and benefits on households”. You can download the report and an excel workbook with the report’s data from: http://www.statistics.gov.uk/downloads/theme_social/Taxes-Benefits/All_fig_&_tabs_0809.xls.
Go to Table 3 to see that all “indirect taxes” (which are consumption taxes) combine to eat up 28.2% of the incomes of the poorest 20% of UK families after counting income support payments, home heating rebates (which were just cancelled in the new UK budget) and VAT rebates. But these consumption taxes combined to eat up only 12.8% of the disposable incomes of the wealthiest 20% of families.
I actually find Figure 4 in the downloadable workbook of the UK tax system analysis most interesting. It shows that in order to balance the systematically unbalanced/unfair basic system, it is now the case that 60% of UK families receive more in government cash subsidies and free “In-kind services” than they pay for in combined net income and consumption taxes. Given that it costs roughly 8 pence on the pound to collect taxes and 20 pence on the pound to admninister the tax rebate and in-kind service delivery programmes, the UK government would now operate more efficiently if it simply terminated all forms of taxation (consumption and income) for 60% of families. In fact, if the result is an opportunity to cut out many of the government-administered cash recycling programmes for lower income families, after exempting 60% from all forms of taxation, the UK government could well also afford to cut marginal tax rates for the 40% wealthiest of families!
Consumption taxes (value-added or carbon) are NOT the appropriate mechanisms to raise new revenues to finance any income tax rate cuts.
By the way, energy consumption taxes and FITs have also proved to be ineffective carbon management tools. When we shift from theory to real life, we will implement product standards–mobilizing the private sector to compete on price and through innovation to deliver new products to the market that are compliant with the product standards. “Put a price on carbon” is a slogan, not an effective carbon demand reduction tool.
WendiG // Jun 24, 2010 at 8:03 pm
If the Fraser Institiute’s stats are as tainted for the HST as they are for school ‘performance’ I doubt if anyone would lend them any credence…none deserved…
Marc Lee // Jun 24, 2010 at 7:43 pm
Nice post, Iglika.
It is truly astonishing how weak the Fraser Institute’s methodology is. It must have been quite a shock for them to have the Statscan study released right on the heels of theirs. After all, who is the typical person going to believe?
Of course, then the Fraser Institute had the gall to put out a press release in their typically arrogant and dismissive style criticizing Statistics Canada’s methodology.
Keith Reynolds // Jun 24, 2010 at 4:50 pm
Thanks for this. It is very helpful in understanding the enormous differences among reported studies.