Jul 6, 2010

Will the HST boost job growth and when?


As BC and Ontario have now started paying the HST at the till, many people may be wondering when exactly can we expect to see those jobs postings opening up.

This is a good question. According to analysis commissioned by the BC government from economist Jack Mintz, titled British Columbia’s Harmonized Sales Tax: A Giant Leap in the province’s Competitiveness, the shift to HST will bring in 113,000 new jobs by 2010. A similar report by Jack Mintz for Ontaro in November 2009, though with the less grandiose title of Ontario’s bold move to create jobs and growth, estimates that Ontario will see 591,000 new jobs over the next 10 years as a result of harmonization and corporate income tax cuts.

These are large numbers, but let’s not forget that these are only estimates and should be treated as such. How reliable are these estimate? Not very.

They’re based on a simple economic model and are inconsistent with estimates produced by the same economist, Jack Mintz, in a Sept. 2008 CD Howe Commentary piece co-authored with Peter Dungan, Finn Poschmann and Thomas Wilson.

In that paper, Mintz and his co-authors used a different model and estimated that Ontario would see temporary job loss for a number of years after harmonization, and a much smaller employment gain (only 5,900) 10 years after harmonization with a provincial rate of 8%.

Contrast this with the November 2009 Ontario HST paper by Jack Mintz (using the same methodology as the 2010 BC HST report), which makes no mention of temporary job loss and projects job growth which is 100 times larger at the 10-year mark (591,000 new jobs). This seems like a very large discrepancy in the outcomes of the two models, so I emailed Professor Mintz asking for an explanation. Here’s his response:

You are right that two different resutls come out although the exercises were quite different.

The first paper on Ontario with Tom Wilson and Peter Duggan was based on a sales tax reform only with no other tax changes.  At 8 percent, the change was almost revenue-neutral — long run impacts would take time due to capital adjusting slowly.  It was also a fixed price macromodel with taxes only affecting the user cost of capital outside of demand effects.  Short-term employment effects were analyzed.

What I did in the second paper was a simple general disequilibrium model with unemployment but modeling both sales tax harmonization and cuts to corporate income tax rates (tax reductions offset the impact of sales taxes on real wages).  The estimate on job creation is based on long run impact over ten years.

Professor Mintz’s explanation shows that the two results aren’t actually contradictory – both papers find positive employment effects at the 10 year mark (which could be considered long-term), and the most recent paper does not make any pronouncements on the dynamics of getting to that employment growth (so it’s compatible with an initial decline followed by strong job growth towards the end of the 10-year period).

What I’m concerned about is the vastly different magnitude of the employment growth results at the 10 year mark in the two papers. The fixed price macromodel Mintz used in the 2008 paper shows employment gain of 5,900 jobs at the 10 year mark, which is almost negligible given the size of the labour force (0.08% increase in employment according to Table A-2). The general disequilibrium model, on the other hand, produces a number that’s 100 times larger – 591,000. I’m not sure if this includes the effect of the other tax changes, but in the BC paper this same disequilibrium model shows that about 80% of the job growth comes as a result of the HST (113,000) while corporate tax cuts have a smaller effect on jobs (28,000 for a total of 141,000 new jobs). If Ontario’s anything like BC, this would still translate into much larger HST-driven employment growth in the general disequilibrium model than in the fixed price macromodel.

It seems to me that the magnitude of the employment effect of HST is not robust. Given that there are no empirical studies on the employment effects of harmonization in Canada, I conclude that the argument that this tax reform will be a boon for job creation is a bit of a stretch and should not be used as a major selling point of the tax.

As an economist, I agree that value-added taxation is an improvement over the current retail sales tax system used in both BC and Ontario, but it seems to me that many of the projected economic benefits of switching to HST are overestimated, especially those that relate to employment and real wage growth.

Further, the findings of Mintz’s fixed price macromodel exercise show that harmonization increases the level of business investment, which leads to GDP growth, but that this GDP growth is not accompanied by substantial (in terms of magnitude) increases in employment or real wages for workers; it seems to accrue almost entirely to capital rather than labour.

This should make us all really concerned about the distributional considerations arising from sales tax harmonization given Canada’s recent rising levels of income inequality and the real wage stagnation.

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