Friday, August 7, 2009

BC Government: Higher personal taxes are good

It is strange what contradictory messages we heard from the BC government within the last couple of days: We were told that higher personal taxes are good for job creation and so are give-aways to profitable corporations in the name of stimulating economic growth.

Energy, Mines and Petroleum Resources Minister Blair Lekstrom announced a lucrative royalties break for oil and gas companies operating in the province
yesterday. We were told on the one hand that it's a very competitive industry but, on the other hand, it needs to be stimulated. (Of course this isn't logical.)

Today Finance Minister Colin Hansen claims that increasing taxes - which the HST (provincial sales tax, PST, harmonized with the GST) will do for consumers by subjecting presently exempt items from provincial sales tax to the HST - is good for job creation. In other words, tax increases are said to be good for the economy. (That's not the song the right wing is normally singing but Mr Hansen insists that tax receipts will fall; see below.)

Mr Hansen said
"by shifting to the HST model, it takes the roughly $1.9 billion of embedded PST costs out of the cost of producing goods and services in the province. That will make us much more competitive." What he didn't mention is that our purchasing power will be reduced through this tax increase. Therefore demand will fall. How can this be good for job creation? Only if the total receipts under the HST are less than what the government presently takes in the form of the PST would this be the case. However, this is highly doubtful since the taxation will affect a broader range of goods.

Mr. Hansen said the implementation will result in a drop in revenues to the province initially, moving to a slight net increase in later years. Many of us still remember Prime Minister Mulroney's claim that the GST will be revenue-neutral, i.e. not be higher than the Manufacturing Sales Tax it replaced. It was just another lie coming from Mr. Mulroney and the tax increase was horrendous.

And this is NOT what Mr. Hansen's source states. (See below)

The PST is charged every time there is a transaction . The GST or the HST is paid by consumers because it is a system that includes credits for GST or HST paid by businesses. GST and HST are so-called value-added taxes and this is essentially a shift of taxation from business to consumers.

Mr. Hansen claims "harmonization will have little impact with respect to the purchase of goods and services currently subject to PST but will mean paying tax on services that are not subject to PST and on some goods that are currently exempt from PST. However, as the current PST embedded in the price of goods and services is removed, it is anticipated that consumers will benefit from a reduction in prices or smaller price increases."

This statement is full of holes.

First of all, taxing goods that are presently exempt from PST inevitably means that their prices will increase. (Does the BC Ministry of Finance propose to rewrite the "law" of supply and demand?)

Secondly, "it is anticipated" that there will be reduction of prices because of the removal of the PST does not mean that this will happen. It didn't happen when the GST was introduced, as far as I remember. (It didn't happened in the UK either when the VAT was introduced.)

And, oops Mr Hansen, your own source (the right wing C. D. Howe Institute) not only states the contrary but also illustrates perfectly the shift of the tax burden. BC consumers are estimated to pay $1,624 billion more and businesses $1,401 billion less for a net increase of 224 million. The latter sum (if this is what will in fact happen) is trivial in terms of the total taxes collected but note the shift in who pays: "Burdens on business would decline substantially with harmonization to the GST base (Table 1 note i) but if such a reform were to be revenue-neutral ... the statutory tax burdens on consumer expenditures would necessarily rise." (p.10) (Nevertheless, on p.14 the author claims: "Overall, consumer prices in the harmonizing provinces fell with the reform, although prices rose somewhat for shelter and clothing and footwear, and that fact tended to make the reform slightly regressive": Oh, the marvels of economics!)

The BC Ministry of Finance makes it quite clear what is really behind this: "Eliminating the PST and moving to an HST will remove a significant tax burden on businesses" and "British Columbia’s decision to move to a harmonized value-added sales tax, together with its previously announced decision to reduce its general corporate income tax rate to 10 per cent by 2011, will demonstrate to the world that B.C. is a good place to invest and do business." (Job creation is the all-time tool for politicians to sell unpopular decisions. Former Premier Bourassa of Quebec, for instance, earned the nickname "Bob Le Job" for the employment he promised the building of the James Bay power plants would create. His claims were lies, or at the very least, a huge exaggeration.)

It's demonstrated not just to the rest of the world but to residents of this province too. Tax relief for corporations and rich individuals
have been hallmarks of Gordon Campbell's governments. In the meantime, people with low incomes have seen their incomes go down in real terms. (That is because prices have risen in the last nine years, incomes have not.)

B.C.’s minimum wage is $8 per hour unless you are a worker with not much experience when it is only $6 per hour. Moreover, the minimum wage has been frozen since 2001.

Legal aid for the poor has decreased by about 25 percent since 2001.

Campbell passed a law that allows landlords to increase rents by a percentage equal to the rate of inflation plus 2 % without the tenant's ability to go to arbitration.

These examples are not the only ones demonstrating the business friendly nature of the BC Liberals and their hostility towards the poor.

HST means a tax increase of 7% for those goods and services which are PST exempt at the moment. (The PST is 7% except for liquor and some passenger vehicles which are taxed at higher rates. It remains to be seen if those rates will come down.)

We are told by Mr Lekstrom that giving money to profitable and allegedly competitive corporations is a good thing and - I kid you not - taking money out of our pockets through new taxes is also a good thing according to Mr. Hansen.

Logic contradicts this and in my opinion neither is a good thing. (However, one has to admire most politicians for being able to say illogical and outright wrong things with a straight face. It takes skill and a certain personality.) The former is said to stimulate the oil and gas industry and therefore economic growth. The latter obviously does the opposite if it reduces our after-tax incomes, which I think will happen.

The new harmonized sales tax or HST will extend provincial sales tax not just to restaurants but a wide range of previously exempt services. It will also add seven per cent to utility bills, funerals, hair care, dry cleaning, real estate fees, movie tickets, accounting, photography, home care and domestic airline fares.

Some goods are taxable at a zero rate with respect to the GST. (It takes a bureaucrat in Ottawa to come up with that idea; or maybe they just want to leave the door open to tax them in the future.) Very few goods are exempt from the GST, some of them only under certain circumstances. For instance, books are exempt from GST if they are bought by various organisations (and do not include a CD-ROM) but individuals have to pay. (Presently books are exempt from the PST if they contain no advertising.) Under the HST books will not be taxable, we are told. I have my doubts based on my experience doing accounting for years and thus having been exposed to the way things work in practise. Do you remember Mr. Mulroeney's promise before the introduction of the GST that food would be exempt? Not if you buy lunch or a sandwich it turned out. There are also a large number of other goods and services - relative to the GST - that are exempt from the PST but will become taxable under the HST.

Some items, e.g. motor fuels, which are subject to the escalating carbon tax will be eligible for a partial rebate under the HST regime. (So much for "harmonised".) Isn't it nice of the government not to hit us twice?

BC is getting $1.6 billion from Ottawa to cover transition costs and there has been speculation that Victoria is going this way to cover the looming deficit. Indeed Mr. Hansen stated that this transfer payment will reduce the deficit. Say what? During the May election, Premier Gordon Campbell insisted this year's deficit will be "$495 million maximum." I wouldn't be surprised if Mr. Hansen includes the entire $ 1.6 billion next September when he presents his budget even though the HST won't be adopted until July 2010. (Strictly speaking this would not be wrong as it falls into the same fiscal period but it smells of manipulating the figures to me.)

Mr Lekstrom can try as much as he wants to convince us that giving money to profitable corporations is a good thing and Mr Hansen can try to convince us that paying higher taxes is a good thing.

I think not many people will agree with them.