Conservatives wish to do away with retail sales tax

The federal government has decided that while the fiscal imbalance is important to discuss, tax harmonization is a very important area of future discussion. Harper will reach for the goal partially accomplished by the previous liberal government: elimination of retail sales tax.

"provincial retail sales taxes continue to be collected in five provinces. These taxes result in inefficient and uncompetitive forms of taxation—notably the taxation of business inputs and exports—as well as increased administration and compliance costs for both business and government" - Restoring Fiscal Balance Department of Finance Paper Page 60

Agreements were reached with Quebec, Newfoundland and Labrador, Nova Scotia and New Brunswick, on operating a combined value added tax, or VAT. In Quebec this is knows as QST & GST, while in other provinces it is known as the HST (Harmonized sales tax).

All other provinces with the exception being Alberta (which collects no retail or value added tax) collect PST (provincial sales tax) which is a form of retail sales tax (RST).

Move VAT and RST are forms of ad valorem tax, a tax with a rate given as a proportion of the price. Ad valorem taxes, have a measure of tax incidence that is determined by the elasticities of supply and demand. Sales taxes are borne by the consumer in proportion to consumption expenditures.

The GST, HST, QST are a VAT which has a broad base of goods and services, while the PST is a RST which usually exempts many goods and services. The one problem with RST's is the problem of double taxation. Some goods that could be seen as consumer goods are bought to be resold. These goods, which the business person has already paid RST on, is then resold with RST being applied once again. (If a good was $100, purchased for $110 with RST, then resold at $110, the final price would be $121, with a tax total of $121) This leads to the difficulty in administration of having breaucrats deciding what is a consumer product, and what is a industrial products. It also distorts the market for services, inducing extra demands, as it is cheaper to higher services, than to purchase a labour saving device (which has RST). RST's can be a major drag on productivity. The RST system has a few advantages, being that it is easier to understand than the VAT, and has fewer points of collection.

A VAT has the advantages of avoiding tax cascading, and the taxation of goods used as imputs in the production of other goods.


Explaining the GST, HST, QST:

The tax is a 7% charge on the sale of all goods and services, except certain essentials such as food, residential rent, and medical services, and certain services such as financial services. The tax is levied on each sale. Businesses that purchase goods and services as inputs can claim "input tax credits", i.e., in general terms, they deduct from the amount of GST they have collected the amount of GST that they have paid. This avoids "cascading", i.e., the application of the GST on the same good or service several times as it passes from business to business on its way to the final consumer. In this way, the tax is effectively borne by the final consumer. Exported goods are exempt, while individuals with low incomes can receive a GST rebate calculated in conjunction with their income tax.

Untaxed items

The tax is a 7% charge on all goods and services except certain items that are either "exempt" or "zero-rated":

* For tax-free — i.e., "zero-rated" — sales, vendors do not charge GST. However, they are still able to recover any GST paid on purchases used in making the tax-free good or service. This effectively remove all tax from these goods and services.
o Tax-free items include basic groceries, prescription drugs and medical devices. Exports are also zero-rated.

* For tax-exempt sales, vendors do not charge tax on their sales. By the same token, however, they are not entitled to credits for the GST paid on inputs bought for the purposes of making the exempt good or service. Tax-exempt items include residential rents, health and dental care, educational services, day-care services, legal aid services and financial services.

*


What the government is doing:

"The Government is also proposing to discuss ideas for further
harmonization of sales taxes in Canada. Harmonized value-added taxes
are already in place in Newfoundland and Labrador, Nova Scotia and
New Brunswick—and Quebec administers a provincial value-added tax,
as well as collecting the GST on behalf of the federal government.
But separate provincial retail sales taxes continue to be collected in five
provinces. These taxes result in inefficient and uncompetitive forms of
taxation—notably the taxation of business inputs and exports—as
well as increased administration and compliance costs for both business
and government."



I believe this can only result in gains for Canadians. with the GST being reduced to 5% and administrative cost savings, the Ontario rate of 15% could soon be 11 or 12%. Exports will benifit, and productivity will hopefully begin to play catch up after being a laygard on Canada's financial record for many years.