Happy New Year

Wow, has it really been almost a month since my last post? Time flies when you're driving to Kingston every day to teach the business and charity world about Harmonization.

Happy New Year folks. Hope yours doesn't involve sitting for 3 hours in the Montreal airport tomorrow. If it does, meet me at Moes.

I've spent the past two weeks in my hometown for the holidays and, contrary to most people's expectations, I didn't end up bored for long. The first day I was bored about 1/2 hour after waking, so I called my cousin and next thing I know I'm staring at the giant axe in Nackawic walking into the rink for a hockey game.

What followed is 2 days of shopping, 2 days of work (boo-urns), Xmas eve, Xmas, Boxing (aka drinking and games) day, 3 days of Boxing day shopping/returning items, a day of four wheeling (w00t), a day of recovery, preparation for New Years, New Years Eve, New Years Day Levee, and a day of recovery. I know I'm an accountant and the days probably don't add up. If I've missed one it likely involved Picarroons Yippee IPA or Best Bitter and a game of Blockus (kind 0f like tetris, but table top with the intention of screwing up your opponents' plans).

All in all I had a great holiday home with the family. As always with theses visits, I didn't get to see everyone I wanted to and I'm sorry for that folks. I do miss you all and hope to see you all soon.

Have a great 2010, we're entering the teens of the 2000s, so don't worry about that pimple, you won't remember in in 2030.

Defending the HST

So a lot of people out there are telling you that the Ontario and BC governments are raising your taxes. How you ask? The HST they tell you. Your (un)friendly neighbourhood curmudgeon is here to tell you otherwise. The HST will save businesses money. The HST will increase investment in Ontario and BC. The HST should drive consumer prices down overall.

First, a bit of a history lesson. The Ontario and BC governments announced plans to harmonize their provincial sales taxes with the federal goods and services tax to create a combined tax; the harmonized sales tax (HST). Everyone panicked and got all up in arms thinking the price of goods and services in Ontario and BC will go up. These people are ignoring the fact that harmonization already happened in New Brunswick, Nova Scotia, Newfoundland and Labrador, and Quebec. And the overall consumer prices in those provinces are no worse off than they were before. A study by Michael Smart for the CD Howe Institute suggests otherwise; consumer prices fell. But most people west of Quebec fail to recognize there is anything east of Ottawa and began to create anxiety with wild stories of tax hikes and Armageddon.

The truth is the HST is going to be good for all of you. First, the cost of doing business in Ontario and British Columbia is going way down. Business owners currently pay 8% PST in Ontario and 7% PST in BC on items consumed in operating their business; generally anything that is not directly resold or further processed or manufactured. That 8% and 7% is not currently recoverable. Post harmonization, the PST going away and is being replaced, for the most part, by the fully recoverable HST. Most businesses will pay a combined 13% or 12% and will be entitled to an equal and offsetting credit. That means there will no longer be any unrecoverable sales taxes payable by businesses. So, businesses save money.

The tax savings realized by business will lead to more investment. With more money in hand, businesses will be able to invest more in new technology and new people. We will all benefit. It's the trickle down effect, the money businesses save and invest lead to more money for other businesses and that trickles down to me and you (hopefully more to me).

It is true that consumers will initially pay more direct sales tax than we currently do as things like houses and services are subject to tax at 13% in Ontario or 12% in BC rather than the current 5% GST rate. However, those houses and services have an indirect tax component (the 8% PST in Ontario and the 7% in BC) that we currently don't see, so the true tax increase is probably more like 2% (based on a study performed a long time ago in NFLD that I cannot share with you). That indirect tax is removed and, provided vendors pass those savings along, the true impact won't be that bad.

Now there are problems, of course, like charities, colleges, universities, hospitals, etc. will pay more taxes and they generally don't recover the HST they pay in the same way as ordinary businesses. I've studied the impact on a few of these organizations and found that, due to a gracious HST rebate mechanism, they will in fact be better off. This may not be true for all, granted, but I assume that the Province will provide additional funding for those organizations that it is required to fund.

I haven't gone into hardly any detail here (BTW, this is my area of expertise), but I hope to make two points to all of you. 1) it's all going to be OK, in fact, it will probably be better after the first few years; and 2) if you run a business, pass those Ontario PST savings along. This is crucial to all of us.

One final point on whether or not the HST is a tax hike. Ontario and BC are losing their PSTs; the HST is a federal tax. While there is a complicated formula that creates a transfer payment from Canada to Ontario and BC, the truth is, harmonization will result in Ontario and BC collecting less tax, even with the transfer payment. This is not a tax hike folks, it is a reduction in overall taxes collected. Look it up, it's in the Ontario budget papers. The reason to harmonize it is to increase investment in the provinces and make the provinces more competitive in the global marketplace.

Now, sit back and relax. It's going to be OK. The world didn't end in the Atlantic Provinces and Quebec and it's not going to end in Ontario and BC.

Money - A Follow Up

So a rich man, Donte Stallworth, kills a pedestrian and gets 30 days in jail and a whole bunch of probation. One crime, one victim.

Bernie Madoff steals millions from many and gets 150 years in prison. One crime as well, though I understand there were many charges (one for each victim of his scheme).

This leaves a really sour taste in my mouth. It isn't fair that Madoff gets more jail time than Stallworth. Listen, I think Madoff should be punished, but isn't a crime that results in the death of a person a worse crime than stealing? Shouldn't Stallworth get more jail time for driving drunk and killing a pedestrian than Madoff gets for stealing?

The manhattan judge Chin said he wanted to send a message. The message I'm getting is that stealing money is a worse crime than driving drunk and killing someone.

It's all Your Fault

Want to know why we're currently in a recession? Take a look in the mirror, the answer is probably staring you in the face. Now I know that the world economy is way too complex to point the finger at all of you good readers, but there are a few reasons that you should shoulder some of the blame.

First, one of the main reasons for the financial crisis/recession/there will be blood situation that we are currently in is banks lending money to people for houses they couldn't afford. Banks are in the business of lending money and maybe they should have known better than to lend Johnny Poorboy $500,000 when he only makes $50,000 a year. But maybe Johnny Poorboy shouldn't have tried to buy that $500,000 McMansion. Maybe Johnny Poorboy should have settled for a more suitable home for his income, maybe a $200,000 town house or bungalow.

But the banks lent Johnny the money. Johnny couldn't afford the payments. The house isn't worth what the bank though it was and we're all in a mess. Everybody is blaming the banks and while they deserve a lot of the blame, I'm also blaming Johnny Poorboy. He should have chosen a more affordable home, but given the state of the economy at the time, Johnny went out and bought a house beyond his means, which was the way things were done.

We lived through the most prosperous time in, well, ever (note, this is not based on any research, though I do recall reading it in MacLeans at the dentist the other day). During our time of prosperity, we began living high on the hog. Buying $300 blue jeans, $500 ipods, $3,000 TVs, $60,000 cars, $1,000 suits, and who knows how much on shoes that Carrie Bradshaw wore or t-shirts that Johnny Drama wore. Basically, we were accustomed to living beyond our means. Credit was readily available so we used it.

Now, in the current state of affairs, frugal is the new black. Credit is not so readily available. People are finding ways to save money, buying less expensive cuts of meat, taking staycations, shopping at thrift stores, and generally getting a kick out of finding ways to save money. Google "frugal is the new" and you'll find over 1,000,000 hits for ...new black ...new cool ...new chic. What I've been doing all my life is now en vogue. Some people used to call me cheap. My uncle joked that difference between cheap and frugal is that the word cheap is reserved for people you don't like. My definition is that a frugal person will spend money, but spend it wisely, always finding a deal. A cheap person is tight with money. A classic example is tipping. A cheap person is a bad tipper. A frugal person tips well, but doesn't eat out a lot.

Don't get me wrong, I'm happy that you all have joined my frugal-edge lifestyle. But I believe if you had always been frugal, or at least less spendaholicy, this recession wouldn't be so drastic or last as long. I'm not so arrogant to say that if you all lived like me that we wouldn't be in a recession, but one of the main drivers of the economy is consumer spending. If we spend more, the economy does well. If we spend less the economy does worse. This is well known, and best exemplified after those planes hit those buildings and that often mocked president urged Americans to go shopping to beat the terrorists. It sounded kind of silly, but when you boil it down, it was pretty smart and had its basis in sound economics.

When you were all living high on the hog, consumer spending was beyond what it should have been. It created an economy that was over-inflated. Now that we're all being frugal, the economy is probably somewhere below where it should be and is over-deflated (I may include over-deflated in my Me Fail English post). Had we all exercised a bit of restraint and spent only within our means in the past, we'd have more money saved today to even out the spending through the good and bad times. You wouldn't have to be as frugal as you are today. The economy may not have tanked as much as it did and would likely recover faster since consumer spending wouldn't have taken the drastic drop it did.

Some of you may not have changed your spending habits. Good for you. But this recent Globe and Mail article says otherwise of the general populace. Hoarding cash is not a good way combat the recession.

There are others to blame, like the banks and the press for their "the sky is falling" headlines. There actually was an article in the Globe and Mail saying that the recession would end in a civil war. Great job guys, way to keep consumer confidence high.

My advice to all of you is to be frugal, not only now, but in the future as well when times get better. But my guess is that you are being overly frugal now, spend a bit more today and a bit less when things get better. Smooth out your spending habits. You'll do your savings some good and the economy some good at the same time.

Economics, Not Politics

(This is a teeny bit technical, but not too much. I hope you read on. If you’d rather not, here’s a summary: Harper chose politicking over math. Politicking bad. Math good. Harper sucks. Curmudgeon mad.)

I knew it wouldn’t take long, but I didn’t think it would happen this fast. It only took 2 days for the Harper government to incense me since I started blogging. It is a result of something they did years ago rather than recently, but the results are finally hitting the fan. Yesterday, Finance Minister Jim Flaherty says this year’s budget deficit will balloon beyond $50-billion, the largest since 1992-1993 under the Mulroney (Tory again) government.

A deficit during a recession is expected, and even encouraged, but $50-billion is a large number that didn’t have to be so large. You see, when the Prime Minister Stephen Harper was campaigning, one of the promises (if not THE promise) he made that helped win him the election was the GST rate reduction. He promised to cut the GST rate from 7% to 5% in two phases of 1% each. According to the gst.gc.ca website, the 2% reduction saved Canadians almost $12 billion in 2008.

Take that $12 billion and subtract it from the $50 billion deficit, and you have $38 billion. A deficit that is much easier to swallow and $1 billion below the previous high water mark of $39 billion.

Assuming you are an average Canadian with an average income and average expenditures, Mr. Harper saved you about $363 bucks last year (that's 12 billion divided by 33 million for you mathematically challenged). That’s around $30 a month, $1 a day. Did you notice it?

Even if you are happy about saving $1 a day, I doubt you actually realized that amount because a reduction in the GST rate will only save you money if you spend money. And a lot of the money you spend doesn’t benefit from the rate cut anyhow. Purchases such as basic groceries, rent, mortgage payments (unless your house is new), health care services, educational services, and certain drugs and medical devices are not subject to the GST. So the real savings that make up that $363 average are probably skewed more towards higher income folks who spend more money on things other than staples.

Mr. Harper would have been better off giving us income tax reductions. Without getting to deep into it, a reduction in the income tax rate gives you more money in hand. You can choose to save that money or spend it. A reduction in the GST rate gives you nothing until you spend money you’ve earned. And here’s where the funny math comes in. When most people have more money in their hands, they tend to spend it. So an income tax cut that costs the government $12 billion in direct income tax revenues doesn’t really cost the government $12 billion because that money gets spent. And when people spend extra money that they are not used to having, they don’t generally spend it on staples. They buy tvs, Ipods, Xboxes, jewelry, and other luxury items that are GST taxable. So the decrease in income tax revenues is partially offset by an increase in GST revenues.

Not only is there funny math in support of income tax reductions, you can target the income tax reductions to the people you want to save the most money. You can lower the tax rates for low income people and increase the tax rates for high income people. Take from the rich and give to the poor. But I suspect the rich contribute to the party and the poor don’t.

Don’t get me wrong, I’m glad my hair cuts, beer, car, PC, TV, and all those luxury items are less expensive now. But I would have preferred to have the cash in hand and it would have been better for all of us in the long run. Plus, next year in Ontario that 5% is becoming 13% on services, new houses, repairs to real property, and other previously Ontario Retail Sales Tax exempt items. Thank you Mr. Harper and Mr. Flaherty with a special nod to Mr. Dalton and Mr. Duncan.

Mr. Harper chose politics over math. He put a big sign in front of a cash register that showed the rate reduction. It’s visible and easy. 7% to 5%. It’s politically smart. But it’s not economically smart. Income tax reductions are. You may disagree. But you’d be wrong.