There are plenty of strong opinions on the pending introduction of HST in BC, where I live. Most of these revolve around the following two facts:
- People feel that it was forced upon them, directly after a provincial election, and by a premier who said that he did not support HST early on in his term.
- Effectively, HST will increase tax that people pay on many items by 7%. This, I am afraid, may really be the thinking behind the implementation of the HST in BC rather than the potential savings the system could offer the province in tax administration.
Of the three commonly used consumption taxation systems in the world:
- Separate entity taxation: PST (Provincial Sales Tax – sometimes State Sales Tax), GST, City Taxes etc, all levied separately based on the location of the sale
- Harmonized Sales Tax (HST) which is really a combination of all the above into one tax line, and reported on a single return to the HST tax authority.
- Value Added Tax (VAT) which is a variable rate tax, based on the value of the item and included in the price that you pay (i.e., HST on steroids)
HST is the second most efficient, from an administration perspective. HST systems are cheaper, and simpler to run, as they require only a single return (and payment) to be submitted to the tax authority, thus saving on multiple tax departments. Distribution of taxes to the city, province, state and federal governments etc. is done by the HST tax authority. In theory HST would be a better system therefore than the current GST/PST system that we have in BC.
Where the controversy comes in, is that in BC HST will replace the current GST / PST system across the board. Currently food, for example is not subject to the 7% PST and incurs only the 5% federal GST. Thus, food, coffee etc. will all go up in price with the introduction of HST by 7%, and in a province that has become known as the Bring the Cash province, rather than British Columbia, because of its elevated cost of living many people are finding this unpalatable.
Personally, I find it offensive that the government would consider introducing a tax like this without at the very least seeking a new mandate from their people in the form of a referendum, but that is another story, and not what this post is about.
The case for VAT
Of the 3 styles of consumption tax systems, VAT is by far the best, and I disappointed that BC did not consider implementing it. VAT addresses several issues:
- It has the same advantages of cost effectiveness for the tax authorities as does HST
- The price you see, is the price you pay, as VAT is included in the retail prices
- It is a variable rate tax, so your coffee would still only incur a 5% tax rate
- Unlike GST, VAT is neutral to the number of nodes in the value chain between the consumer and producer (GST is levied at each node in the value chain, VAT is only levied on the value that is added at each leg and only charged at the end of the value chain.
There are a number of countries in the world that use VAT as their primary for of sales taxation; the two I am most familiar with is the European Union, the United Kingdom and South Africa.
South Africa is probably the most interesting example, as they have a complex population mix, with citizens that are well below the poverty line as well as citizens that would be considered affluent by North American and European standards: it could be thought of as a hybrid first and 3rd world country. South Africa addresses this imbalance by having two different VAT rates. 0% on all staple foods (milk, eggs, brown bread etc.) and 14% on all consumer goods and services. The theory is that since this is a consumption tax, more affluent people are greater consumers of commodities (wide screen televisions, restaurant meals etc.) and therefore bear the greater burden of this tax, while low income families are not taxed on their basic consumption.
In BC it would be appropriate to introduce at least 3 levels of VAT. A regular level of 12% to match the existing GST and PST combination, a reduced level of 5% for previously PST exempt items, and possibly a 0% rate for items that are taxed in a different way (gasoline) or potentially staples that would need to be zero rated.
VAT has additional benefits in that, at least from a government perspective, it is difficult to totally avoid, particularly in the small cash based services industry where most tax avoidance happens. For example, a plumber may give a home owner a “cash” price for a job. In this case the home owner gets a lower – tax free price – in exchange for not receiving a receipt. The plumber avoids declaring the cash received from the home owner as income and also avoids paying VAT on his labour. He is however unable to completely escape paying VAT, since in the absence of a tax receipt given to the home owner, he would be unable to claim an input tax deduction on the parts and materials that he used to effect the repair. From this perspective VAT is a more efficient tax to levy, having lower administration costs and better compliance.
As VAT is included in the ticket price, consumers have a much clearer idea of what they will be paying at the register, than in the current GST/PST and the proposed HST consumption tax systems. Generally this leaves consumers feeling more positive toward the tax as there is no register shock. In most countries that use VAT, sticker items must also show the VAT proportion, in smaller letters, much in the same way that many retailers today place the specific price (i.e., price per 100ml or price per ounce) on containers of varying size of competing brands so that consumers can compare the actual price. This allows consumers in a grocery store, to see what is zero rated and what incurs a 5% or a 12% tax, allowing them to adjust their purchases accordingly, if they so choose.
