Coming to terms with the HST

This past holiday season, the kids received a DVD of heritage-era cartoons, not the ones with either of the famous big-eared rodents, but instead a collection of fractured fairy tales. One in particular caught my attention – a tongue-in-cheek version of the story of the ant and the grasshopper.

You’ll recall the original pitted the industrious ant against the perpetually procrastinating grasshopper. The ant stored food for the lean times while the grasshopper consumed and played. Come winter, the grasshopper either died out or came grovelling to the ant’s storehouse.

Of course this isn’t all that amusing for the wee ‘uns, so the cartoonists exercised their poetic licence and acerbic wit to turn the tale on its head. The grasshopper could do no wrong, and the ant (despite the best of intentions and efforts) ended up worse off for those saving ways.

At one point, my eldest (all of 5 years old) commented between giggles that it didn’t make much sense, but it sure was funny. And it was, for a cartoon.

Not so funny if savers in reality were to be worse off for their efforts. This would be particularly ill fortuned if it were attributable, even if only in part, to taxes imposed by their own government.

Taxes are innately good

It’s true and it’s an important premise that needs to be stated before continuing. Taxes are the primary means by which we finance our society. They are the necessary balance to service the expense of providing the infrastructure and public goods that otherwise would be left undelivered or unsupported if we all operated strictly in our respective self-interests.

Thus, while taxes themselves may be good, the implementation of an effective taxation system struggles with NIMBY. No, that’s not another classic cartoon character. It’s a classic response to the spectre of new taxes: “Not in my backyard.” The problem with NIMBY is it’s totally lacking in principles, while laden with self-interest.

So the issue is not “if” tax revenue must be raised, but “how” to do so. This then is where political, social and economic values may very well come into conflict, often lining up along political party lines. Although the tension may be unavoidable, its resolution need not be insurmountable.

The impending HST

A broad-based consumption tax like the GST, and in turn the HST, can be an effective way to spread tax need across a population. Though it is inherently regressive in that it imposes a higher burden on low-income payers, the concurrent implementation of a targeted tax credit mechanism can be used to address this equity concern.

Being broad-based is critical. If otherwise taxable units are zero-rated or exempted from tax liability, the tax base may be eroded and remaining taxable units must be charged a higher rate. Whether the distinction arises out of social policy or industry lobbying, it influences consumer actions and has economic consequences. With respect to industry lobbying particularly, the undercurrent of self-interest again surfaces.

That said, in my opinion there is an even more fundamental concept to be probed, which is whether consumption taxes should apply to savings, directly or indirectly.

Savings as consumption

Savings is not as simple a concept as one might expect. There is a large body of tax and economic literature on the issue, and it is an ongoing debate. Much of this is under the umbrella of income tax – specifically if and how unrealized income should be taxed. In the Canadian system, we generally defer taxation on unrealized capital gains, and on all types of income and accretions in most registered plans until withdrawn.

So, having taken a position on the taxation of savings in the income tax realm, is that being coordinated on the consumption tax side?

To the person on the street, a reasonable definition of savings might be “that which is not consumed.” Accepting that for the moment, it would seem illogical that a consumption tax might be applied to something that is not consumed, at least in the practical sense.

The counterpoint would hold that GST/HST is not imposed on savings, but rather on services employed in the management of those savings, such as mutual fund management fees. Nevertheless, it is the savings that carry the burden of the tax – though one degree removed – and therefore the distinction may be technically correct but practically indistinguishable.

Presumably, if savings are kept clear of GST/HST (directly or indirectly), there will be more to be consumed later. Arguably then, this may be no more than a deferral of the consumption tax, and potentially an increase in the base upon which to impose that tax when truly brought into consumption in future.

Is that all, folks?

The precarious state of the pension and retirement income system has been in the forefront as we have worked through the current economic downturn. In fact, the ministers of finance met to discuss the system this past December and will come together again in May.

While the Ontario HST can be expected to be implemented pretty much intact come July, here’s to hoping that future amendments to the GST and HST take into full consideration the practical impact they have on savings, retirement and the broader economy.