The need to front load HST benefits
Nov 11, 2010

The need to front load HST benefits

Whenever one experiences a significant shift in tax systems such as the introduction of HST in Ontario or BC the result is an immediate distortion on the economy. Overtime, competition will move the economy to a new equilibrium point represented by the new tax scheme. However, since it takes time for this equilibrium to be achieved but consequences exist immediately, there is a need to couple the changes in the tax systems with immediate benefits that ameliorate the distortion in the short term and then are withdrawn in longer terms as the market catches up.

For the sake of discussion, let us simply accept the premise that the HST is a superior tax code that will create a stronger economy that benefits the average tax payer. Consider the example of any business which now pays lower taxes because of the changed code. Overtime, competition will compel them to lower prices to consumers otherwise a competitor may come in who will do this and take market share. However, because competition in an economy is granular and localized, this effect will not be immediate. The result is an immediate benefit to the company but not the consumer as prices are not lowered until compendium dictates this. Contrast this with a business whose consumers pay higher taxes now such as, say, hair cuts under the new HST regime. Here consumers experience the extra cost immediately while the extra benefit in the former case is delayed. This lag time gap in benefits can be reduced by coupling the tax changes by immediate assistance which benefits people in the short term to compensate for the delay.

With regards to the HST, the provinces have actually received significant transfers from the federal government which could be used in this manner. The problem is that little of this has gone in a meaningful way directly to ameliorate the transitions. The result for many people is they see the immediate price increases in a large host of commodities which detracts significantly from the message of the longer term merits of the proposal. Regardless of the economic merits of facilitating a smoother transition, more aggressive coupling of temporary relief with the tax changes may have simply made for HST to be a more politically acceptable change.

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