Chow Time

I got this pamphlet in the mail. I live in the Trinity-Spadina riding, which is currently run by Olivia Chow. Normally, I just toss pamphlets like this away, but there was something compelling about the woman on the pamphlet. You see the way she has taken off her glasses and is pinching the top of her nose? As an accountant, I know exactly what that is about. That's what you do when the numbers don't make sense (or sometimes, you do that when you're adding a really long list of numbers, and then you type something in wrong and have to start over).

Let me walk you through the document. According to the NDP literature, the first important thing you need to know is that there is a "tax grab" going on and everyone is in on it (except for Olivia Chow and Jack Layton) . Harper, McGuinty, Ignatieff - all of them grabbing tax like a bunch of tax grabbers.

Then she walks us through some of the items that will be subject to the HST, and therefore have additional sales tax next year. Coffee. Donuts. Newspapers.

What kind of red-blooded Canadian wouldn't buy those things? It's clear she's aiming for a nerve.

Then she drops the bomb. She explains how "they" are getting away with it.

"Stephen Harper's conservatives are bankrolling them with $4 Billion of your own tax dollars." Our worst fears confirmed. They are exchanging our money for more of our money.

Of course, there are some details left out of the pamphlet. For one, she is missing a portrait of her and Jack Layton together. I can provide that:


The other thing missing is that Chow never does explain why "they" are taking our money (and exchanging it for more money). I will do that too.

Ontario is in more trouble as compared with the rest of Canada. Look at this graphic, courtesy of the globe (no seriously, look at it, it's cool). You will see the national unemployment average of 8.7%. You might also notice that most of the Ontario cities have a higher unemployment rate than the National average. As a nation, we are lucky to be so resource rich (I'm looking at you Western Provinces), and to get through this recession, we need to share that wealth across the board. That means Ontario gets more federal transfer payments to support our unemployed. The deal, as I understand it, is that in exchange for continued federal transfer payments to cover what will be whopping deficits in the years to come, we give the feds our PST.

It's a cheap trick to blame McGuinty for participating in the HST. I can't imagine that he really had a choice in the matter. To function properly as a country, it only makes sense that if you are completely dependent on the federal government transfer payments to make provincial ends meet, then the federal government should have control over your sources of income (such as taking over the sales tax).

However, from what I see, Ontario is actually in much more trouble than people think. We can use these transfer payments over the next few years to create jobs, extend employment insurance, subsidize adults to get retrained in school, but these are just temporary solutions. The elephant in the room is how we plan to replace the old manufacturing jobs that we have lost?

Getting through the next few years is a no-brainer. Redefining the Ontario economy for years to come is actually the exercise that requires thought, and I don't see anyone thinking about it.

Harmony

[This is a piece I wrote in the Spring when all this Harmonized Sales Tax stuff came up. I never ended up posting it because it really wasn't as a big deal at that time (massive job losses and slumping economy were dominating the headlines). But the decision to harmonize our sales taxes with the Federal authorities will continue to pop up, most likely as a political issue. This should provide a good background on why we did it and what it means, and it's a nice preface to my next article. The real reason I'm doing this is because I want you to be able to spot political misinformation as soon as you see it. When I hear the way politicians speak about tax issues, it's obvious they're counting on us to have no understanding of what is actually happening.]

Ontario recently passed the adoption of a single, unified, Harmonized Sales Tax which will now be referred to as the HST. It won't fully affect Ontarians until 2010, but I figured it can't hurt to know a little bit more about this change. This graphic from the Toronto Star provides a great summary of what goods will be affected by this tax change. You might want to take note of the “No longer PST Exempt” section of this graphic – this means all of these goods will be taxed at the new HST of 13%, rather than just GST at 5%.

There are some other important differences moving to a single harmonized sales tax. We’re moving entirely to a Value-Added Tax, whereas before only the GST portion was structured as a value-added tax. I'll illustrate what that means with an example, but let's cover some of the big stuff before we get into the detail.

Harmonizing the sales tax in Ontario (PST) with the federal tax (GST) to make one unified tax does several things:

1. Businesses no longer have to file two separate sales tax returns. They still have to pay the same amount (8% PST +5% GST = 13% HST). According to several sources, including the graphic above, the government estimates that harmonizing will save Ontario businesses $500 million in costs associated with filing two separate retail tax returns (one to the Province, and one to the Feds). In other words, at $50,000/year, per person, harmonizing sales tax will put 10,000 people out of employment.
2. Something Ontarians might find annoying in the future is that by harmonizing the sales tax with the federal government, Ontario has lost its ability to govern 8% of the total sales tax. They have given up their power to encourage or deter goods or services by using the sales tax. The feds decide that now.
3. The truly interesting part of harmonizing sales tax is that we now have a single Value Added Tax. The GST was already a value added tax, while the PST was not.

So, what is a value added tax?

A traditional sales tax system simply slapped a tax on the end user of a product or service. The various businesses involved in producing the good or service did not have to deal with the tax – only the retailer would collect it on the government’s behalf, and submit it to the government periodically.

A value added sales tax, on the other hand, taxes a business each time it adds value to a product or service. If we were selling paper airplanes for a living, this is how it would work:

• I would go to Grand & Toy and purchase paper, on which I pay 13% HST (the new value added tax) on $10 worth of paper. So I’ve paid $1.30 in tax;
• I sit at home that night, adding value to the product by making sheets of paper into airplanes;
• I sell my planes the next day, for $100, plus HST of $13, for a total of $113.

Total Taxes I collected on behalf of the government: $13

Total Taxes I paid in the process, that I should be reimbursed for is $1.30

I give the government the net of those two when I file my HST return: $11.70

Grand & Toy owes the government $1.30, because to them, I’m the end user of their product (paper).

In total the government receives the same amount as it would if only the final end user of the product (the consumer) paid the $13 tax. So why do it this way?

There are several advantages with a value added tax system, but two are relevant here. First, VATs require that businesses have to track the sales tax collected and sales tax paid, every step of the way. This means companies lose the ability to tax on top of tax, which is called "cascading," and is something that unnecessarily contributes to higher prices.

The other benefit is that the government does not have to wait for the end user to pay the tax, it will receive money throughout the process, which helps facilitate tax collection for the government.

Ontario should be able to leverage more transfer payments from the Federal government in exchange for giving up its right to control sales tax. The Ontario government itself has projected provincial deficits until the year 2015. It's not fair to analyze the economic affairs of a single province alone, because all provinces are heavily dependent on transfer payments from the Federal government to pay their bills. But if you are curious about what the projected Ontario 2009/2010 income statement looks like, this picture sums up the best guess.

Recession and Hip Hop

Here's a story that's not getting much coverage. You will be shocked.