Wednesday, April 7, 2010

HST and the economy

I wonder the effect of the HST on rates. The two largest population provinces in Canada are instituting 8% tax hikes this year and that will have an effect on their provincial economies. When the GST was implemented, it led to a period of recession in the Canadian economy as many Canadians stopped spending their money (and saved more).


The HST is just for two provinces, so I think the effects of it will be erased by Christmas.  I do not foresee a long term recession developing from this.  I think it will stall some recovery in at risk sectors of the province and it seems to me to be an ill advised time to be levying taxes. 
 
I do think retailors will experience a huge Christmas season this year, as a function of pent up spending demands.  People will grow weary of hibernation and start spending for the holiday season.
 
For real estate, the HST only applies to new homes, not resale.  It will apply to the fees in resale - Realtor fees, Lawyer's fees, etc.  The big effect in HST will be on new homes.  It is important to work with a knowledgeable guide when buying a new home, as there is a formula for calculating HST in your new home purchase. 
 
An interesting thought, with a huge percentage of the Canadian population living within driving distance of the US border, are you going to see a huge increase in cross border shopping?  Canadian dollar on par and possibly moving into a position of superiority, lower cost of consumer goods in the US and a new 8% tax on food could lead to a mass cross border shopping movement. 
 
That exodus of dollars from our local companies into a foreign country could prove very costly for our local economies and potentially profitable for our Southern neighbours.  Interestingly enough, travel from Europe to the US is up significantly, which means lots of foreign money being spent in the US.  Potentially, this "foreign investment" could help fuel the US economic engine back to it's previous highs faster than anticipated.

I think like all tax hikes, there will be a period of grumbling, then acceptance and hopefully, very shortly after that a period of lowering the tax.  I think 13 % is a bit heavy, rumours have a reduction of the provincial portion by 2%.  This can be accomplished as many things that were previously not taxed (ie food and labour) are now eligible for the additional 8%.  Let's hope we see this reduction starting in a budget in the coming couple years, but with our record level debt, it is unlikely to happen for another 3 to 4 years. 

4 comments:

  1. Many people get confused with what exactly HST is. It's not really a tax hike. For many businesses it will actually be a tax relief. And according to supply side economics this could lead to increased growth and lower prices. Maybe this is already happening as I heard from a friend that Minto is absorbing the difference in taxes on a new build that they're considering buying.

    HST is a value added tax, which is overall more efficient than the cascading tax system of PST. And many websites say that the provincial government does not anticipate increased revenues from HST. Many places in the world use value added taxes. We're just catching up.

    However, I agree that it may have a negative impact in the short term due to the populations perception. We'll just have to see if we can make it through the short term and eventually see the benefits of HST.

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  2. Most new home builders are including HST in their prices. The rebates for investors are predicted to mirror the GST rebates.

    As for "value added" taxes, anything that takes money out of my pocket and puts it into the government does not really seem to add value for me.

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  3. The "value added" term refers to the fact that taxes will only be added to products when value is added, hence companies will be able to get a rebate on the HST for business purchases (similar to GST rebates in the past). So, ideally companies will save more money with HST, and ideally that will either allow them to drop prices or produce more (i.e. more jobs).

    Unfortunately BC also adopted the HST at the same time, so relative to them, companies don't have much incentive to come to Ontario. But hopefully they vote down the HST in BC in the next referendum, then more companies will come to Ontario, which will create more jobs, which creates more wealth, which creates high real estate prices, which equals more money in our pockets than that lost in sales tax.

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  4. Thanks for the information. I was attempting to be sarcastic with my "value add tax" comment. For people that didn't understand how HST is slated to work, that is a very clear and concise answer, I think it will help some people out.

    I do hope we attract more business to Ontario, I think the first step will be replacing the current Ontario government with a government that is more business friendly. The low corporate taxes are a big help as well.

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