Social Media

Friday, 17 January 2014

Is Alberta ready for a sales tax?

by Jack Mintz

In September 2013, Philip Bazel and Jack Mintz wrote a School of Public Policy research paper looking at the adoption of an 8 percent Alberta HST (Harmonized Sales Tax) that would change Alberta's tax structure by sharply reducing personal and corporate income taxes.

Three things to know about taxation in Alberta:

  1. Economic studies have shown that consumption-based taxation is better than income taxes since the latter impedes investment and savings.  The HST in Alberta would bump up personal tax exemption to $57,250 per individual, lower the personal income tax rate to 9 percent, and lower the general corporate income tax rate to about 8.4 percent.  It would encourage saving and investment, and improve Alberta's competitiveness (see studies by Professor Bev Dahlby, for example, on the marginal cost of raising revenue).

  2. A province like Alberta attracts tourists to well-known sites like Banff, Jasper, Calgary Stampede, and the West Edmonton Mall.  It also attracts short-term workers who do not pay income taxes in the province.  Almost 10 percent of Alberta HST revenues would be paid by non-Albertans who benefit from government spending on roads, highways and other public services.

  3. Alberta relies on volatile revenues that complicate fiscal planning.  HST revenues are less volatile than current own-source revenues in Alberta: about two-thirds less volatile than personal and corporate income taxes and almost 75 percent less volatile than natural resource revenues.

Three myths about the adoption of a sales tax in Alberta:

Myth #1:  The HST would act as a gateway, leading to more taxes and a larger government.

The Reality: There is no clear evidence that the adoption of the HST (known elsewhere as Value-Added Tax) leads to larger government.  While many remark on the size of European governments with VATs, countries like Japan, Australia and New Zealand with VATs are not high-tax economies.  Even Canada, which has had a sales tax since 1991, has had a declining tax-GDP ratio in the past two decades.  Taxes can be introduced at any time, but most have greater economic impact than the proposed HST.

Myth #2:  Bringing in an HST will hurt the poor since it is a regressive tax. 

The Reality: The Bazel-Mintz proposal is distributionally neutral.   The increased sales tax paid by households is fully offset by personal tax reductions and the low-income refundable sales tax credit for all household income levels.  Some HST on business inputs is offset by corporate tax reductions.

Myth #3:  Introducing an Alberta HST would complicate the tax structure.

The Reality: The HST is just a matter of increasing the existing 5% sales tax rate in Alberta. Under the Bazel-Mintz proposal, only 30 percent of Albertans would pay personal income taxes.

Jack Mintz is the Director and Palmer Chair in Public Policy at the University of Calgary School of Public Policy.

1 comment:

  1. Very interesting post. Are there other resource-based economies that have adopted HST? Has their been any impact to business growth or population growth?