With the HST looming in Ontario and BC, I thought I’d take a few minutes to explain why the government argues that the HST is good for business.
Under a PST (aka RST) system, the PST is paid by whoever consumes the goods. So if you buy a hairbrush for example, you will be the one “consuming” it, so you have to pay the PST.
For service business, it’s a little more complex. Let’s say I have a business installing widgets. I have to buy a widget for $100 and provide installation services which cost me another $100. My total fee to my customer is $300. Since I’m installing the widget, my business is “consuming” the widget, therefore I have to pay the PST on it. The business implications, including taxes are as follows:
Selling price: $315 = $300 + $15(GST)
Cost: $218 = $100(widget) + $5(GST) + $8(PST) + $100(labour) + $5(GST)
My profits: $92 = $300 – $234 + $5(GST credit on widget) + $5(GST credit on labour)
Government gets: $13 = $15 (GST collected) – $5(GST credit on widget) – $5(GST credit on labour) + $8(PST)
Under the HST system, the business gets to claim a tax credit for the PST paid as well, since that cost is now passed on to the end user. Basically the PST behaves the same way the GST does; that is, the government’s take is what I collect minus what I pay. So continuing with the same example:
Selling price: $339 = $300 + $39(HST)
Cost: $226 = $100(widget) + $13(HST) + $100(labour) + $13(HST)
My profits: $100 = $300 – $226 + $13(HST credit on widget) + $13(HST credit on labour)
Government gets: $13 = $39 (HST collected) – $13(HST credit on widget) – $13(HST on labour)
So you can see that the government doesn’t actually get any more money directly by switching to an HST system. What happens is that the end user price goes up, and this money effectively gets transferred to business through additional profits. The government does then get an extra cut when the business pays its income taxes.
Then what’s the point? If the government doesn’t get a bunch of extra cash, why switch? There are two primary political reasons for making the change. First, by taking less tax from businesses, the province becomes a more attractive place tax-wise to do business. Businesses here are more profitable than they are in provinces that have a PST system. The second is to pursue economic growth. Since businesses should now have more money, they should be in a better position to expand; to hire.
A third reason, as noted above is the increase in the income tax base. As a baseline, the government comes away from the switch even, but increased profits in business mean increased income taxes paid to the government.
So businesses win. The government wins. The consumer… well, we kinda get screwed over, except to the extent that we own businesses, find new jobs, or benefit from the government’s use of the additional income taxes collected.
