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.

Ottawa Does it Again

Since I moved into my new apartment in June of 2008, summer's have been a mess. The city of Ottawa has been renovating Bank Street, tearing out the old street, fixing whatever is wrong underneath and then repaving. It's created a mess of dust and a foul stench during the hot days of summer.

This summer the city added a new wrinkle. You can no longer access Bank street from Lewis because Lewis is a one way street. To allow those folks who can only leave their houses from Lewis to legally drive to the next intersection the city temporarily made Lewis a two way street. It's a bit of an annoyance since the street is not built for two way traffic, but there isn't really a ton of traffic on the street and I walk or bike most places anyhow.

Today I read this article in the Ottawa Citizen. The city is fining people who park on Lewis facing west, which is the ordinary direction traffic flows when the street is a one way street. People are steaming and I don't blame them.

I'm going to sound like I'm mimicking the article's author, but that's because I fully agree with Hugh. Because of the reconstruction project Bank street businesses are hurting. If you fine people who decide to deal with the annoyance of walking down a dirt sidewalk to shop at the Herb and Spice store or grab a pint at the James Street Pub for facing the wrong direction in a parking spot, a wrong direction that is ordinarily the right direction, you are going to make people think twice about heading to Bank street. It's already a mess and a pain in the ass to navigate around. Adding a $35 fine is just the cherry on top.

I've had issues with Ottawa parking police in the past. I've fought every ticket and won each fight. I think it's because they are generally over-agressive. But this story just takes the cake.

Great job Ottawa. Way to help out the Bank street businesses.

Dirty Rotten Filthy Stinking

I've been out of the real world for the past week and a half attending bluesfest. I was alerted to this report by my friend Siobhan. Goldman Sachs and JP Morgan Chase reported huge profits for the past quarter, less than a year after taking US taxpayer dollars to ensure their viability. The bailout numbers are staggering and are even hard to comprehend to someone who deals in 7 to 9 figures every day (not my own):

• Goldman Sachs received $13,000,000,000; and
  
• JP Morgan Chase received $25,000,000,000.

Not only did the US government provide the above aid to the financial institutions, they guaranteed the "toxic assets" held by the institutions. The toxic assets are essentially the loans that they, or other banks, made to people who couldn't afford to pay them back for overvalued homes.

Now, just a few short months later, each of the above banks is showing a profit for the last two quarters, as follows;

• Goldman Sachs - $1,800,000,000 and $3,440,000,000 for a total of $5,240,000,000; and
  
• JP Morgan Chase - $2,000,000,000 and $2,720,000,000 for a total of $4,720,000,000.

The banks that needed the bailout money so badly to ensure their viability turned a profit in just 8 months, which begs the question "did they really need the money?" Probably not, but the question that is baffling me right now is "where's the outrage?" Aside from some jokes from Letterman, Stewart and the rest of the late night gang, there's little to no reaction from the American public. What gives Yankees? Don't you care about how your government spends your money? Do you even know what's going on or are you too busy watching Lance Armstrong in a race you only care about because Lance Armstrong is in it?

I started this column wanting to complain about the banks in the US for pulling the wool over the eyes of the public and just being the dirty, rotten, filthy, stinking rich pigs they have always been. But now I think the public is dirty, rotten, filthy, stinkingly apathetic and if you keep letting them get away with it then you deserve it.

The National Part Deux (or Shut up and Sing)

I saw the National again tonight, but this time at Bluesfest. They were much tighter than the first time I saw them earlier this year. The show was great and I really have nothing bad to say about their set or their sound; it was awesome. But two things happened at the show that grinded my gears.

First, there was some bad weather. It rained about 3 songs into the show. It's been raining regularly Bluesfest and we now go prepared with raincoats and umbrellas. So we open said umbrella and apparently obstructed the view of some biatch behind us (you'll see why she's a biatch shortly). I appreciate that an umbrella can obstruct your view. I also appreciate you coming to tell me that the umbrella is obstructing your view in a polite manner rather than poking my girlfriend and saying "Are you serious?!?!There are people behind you!" No shit? There are people behind us at a concert? I had no idea. Whatever happened to politeness? There really is a better way to say that and it's not that hard. It involves a magic word that I'm sure Bert and Ernie taught you once.

The second thing that annoyed me has annoyed me with bands for years. From the Dixie Chicks to U2 and even to Pearl Jam, bands have felt the need to pass their political and social agendas on to their fans during shows. I don't mind if bands are political or work towards raising awareness for a cause or do whatever it is they do. In fact I applaud it. But I don't like it when a band stops playing a third of the way through their less than one hour set, grabs a sheet of paper (you didn't even memorize it?) and wastes five minutes telling me about World Aid. I came to see you sing. Shut up and sing.

Great show though.

Carbon Market

Your governing PC party detailed its carbon market plan on Wednesday. No, not carbonite market, the carbon market. They are trying to show you all that they are concerned about the environment and trying to reduce carbon emissions. Given that the world is full of stupid people, it will probably work.

The following is a summary for those who don't want to read on (I know you don't like politics).

Environment Minister Prentice to voters:

We are placing caps on carbon emissions for all polluters in Canada.

Environment Minister Prentice to polluters:

Don't worry, you can buy your way out of it.

I shouldn't be so critical, but like the polar bear with the big paws, I was born that way. So the plan, as outlined in this Globe and Mail article, is to put a cap on carbon emissions. You can only emit up to a certain upper limit. Great idea by the way, at least 10 years too late (and the Liberals have their share of the blame in that) but great idea. But, if you emit beyond carbon beyond that cap, don't worry about it, you can buy credits on the open market.

How do I buy credits you ask? Easy, somebody is going to be such a good reducer of carbon emissions that they'll be far under the cap, you can buy the surplus from them. And in the event that no polluter has reduced emissions (worst case, but conceivable), there will be carbon projects that you can buy credits from to get you under the cap by offsetting your emissions.

This really ticks me off. Buying credits doesn't reduce a polluter's emissions. Rather, it helps to create projects that offset the emissions. Don't get me wrong, I understand that carbon offsets are a good thing. While they don't reduce emissions, they compensate for the emissions by making reductions somewhere else.

According to Mr. Prentice, the goal is to gradually reduce the ceiling of the cap to control emissions, but what if actual emissions never go down? What if, instead, polluters just buy more and more credits because it's easier and cheaper? Does this really solve the problem?

I know this is a step in the right direction, it just doesn't feel like enough. I'd prefer a hard cap and a mandatory credit system to offset emissions under the cap. But I suppose if I were in power, we'd be faced with a record setting deficit.

Bailout Schmailout

The federal government and government of Ontario announced plans to bailout General Motors yesterday. This isn’t really news, but the structure of it is. The federal and Ontario governments will receive preferred and common shares in a recapitalized GM. Essentially, you, as a taxpayer, are buying GM stock. How do you like them apples? I bet none of you would personally invest money in GM. At least you won’t have to pay any transaction fees.

Ontario Finance Minister Dwight Duncan is optimistic of GM’s future after the company files for bankruptcy. It will be a restructured organization, out from under much of its debt and better prepared for the future. A lean, mean, gas guzzler producing machine.

The future!?!? The future is flying Deloreans that run on banana peels and garbage, clothes that dry themselves, self-extending baseball bats, and floating skateboards, not more Hummers that burn more gas and oil than a 747. Bailing out the auto industry is a complicated issue, more complex than I can handle, but I have a grasp on it. Lots of people work at GM or work for companies that supply parts to GM. These people shop at stores where other people work. If GM fails then jobs are lost, people stop shopping at these stores and more jobs are lost. It’s the trickle down effect. So I can understand why the government would want to keep GM floating; to keep Canadians employed and money flowing. Some jobs may be lost as a result of restructuring, but not all of them.

But I don’t understand why the government wants to keep people employed with GM? I don't care if GM is better equipped to handle the future, I want a Canada that is better equipped to handle the future. Why not invest in other technologies that will create other jobs for the displaced employees? Invest in new technologies. Hell, the nickel used to make the hybrid batteries is mined in Sudbury, why not invest in a hybrid battery plant. Invest in some technology I haven’t heard of, maybe algae batteries or Ipod Thinks (you don’t even have to touch them).

Sure, some jobs will be lost as some displaced workers may not be relocated, but isn’t that the same scenario as above. The result is the same except instead of having people employed at a factory that produces old technologies and cars that are losing market share to foreign vehicles we have people employed in new technology factories, factories that could bring Canada to the forefront of the modern manufacturing world.

But no, the future, according to our leaders, is the same as the past, except now you have a stake in it. I’m going to make a bold prediction about this future. We’ll come out of this recession sometime. And In 10 years or so after that there will be another recession. We’ll come out of that one too and the cycle will continue. That’s the way economies works.

Maybe I’m wrong, maybe GM will invest in new technologies and both GM and Canada will be better equipped for the future. But GM had plenty of time to do that before and didn’t until they were forced to react to Toyota and other forward thinking auto makers. Instead they produced gas guzzling SUVs and trucks to keep profits high. Maybe they will, but I’d sooner invest in flying Deloreans that run on banana peels and garbage, clothes that dry themselves, self-extending baseball bats, and floating skateboards.


Update: I just read the paper and the following quote is from the Globe and Mail:

At General Motors of Canada Ltd. alone, the rescue package could amount to a staggering $1.4-million for every job saved, with no guarantee that the bailout will ensure the long-term survival of the company's remaining auto assembly and engine plants.

Update #2: Most of the loan won't be repaid.

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.