The Ontario government's plan to harmonize its sales tax with the federal GST has generated vast amounts of sound and fury. But a closer look suggests that this is quite misdirected.

Such a closer look comes in a recent study by Ernie Lightman and Andrew Mitchell of the University of Toronto, available from the Canadian Centre for Policy Alternatives.

They look at the HST plan, including the tax credits and personal income tax changes that are also part of it.

Opponents of the plan point out that harmonization means that many items exempt from the provincial sales tax will be subject to the HST, and that the tax rate will still be the same (8%). They call it a tax grab.

Lightman and Mitchell conclude that the government has actually done quite a good job of balancing out such effects with its sales and property tax benefits, and with income tax reductions.

They find that the package as a whole is very close to revenue neutral for most consumers, but has a small tendency to hurt the rich and help the poor.

But if the change has little effect, why bother making it?

The finance department commissioned a study of the plan by Jack M. Mintz of the University of Calgary which seems to lay out the thinking.

This is intended to boost business investment.

Today, businesses pay sales tax on many things. Goods for resale are exempt. So are things which manufacturers incorporate in their products, and equipment used directly in production.

But vehicles, office equipment, communication services and many other things are taxed.

Under the HST, all of these goods would be subject to the 8% provincial tax at purchase. But if they are business inputs, businesses can deduct the sales tax paid from the tax collected on their own sales and only send the government the difference.

So they effectively get all the tax they pay back again.

The plan also reduces corporate income taxes. Previous legislation eliminates the capital tax in 2010. Some revenue will be recouped by eliminating some obscure incentives.

Because some sectors buy a lot of things now subject to sales tax, they will benefit more. Construction and communications are big winners. Manufacturing and agriculture, not so much.

My concern is not that this is a tax grab, but that it is a tax cut. Consumers pay the same. Business pays less.

So what about money for education, roads, and other government programs? Health care costs are sure to keep rising as the population ages and new treatments become available.

It is perfectly appropriate for governments to run deficits as long as this recession lasts, but they need to eliminate them when things return to normal. Permanent tax cuts are not the way to do that.

Mintz argues that lower business taxes will attract investment, which will raise employment and wages, and so government revenue.

Also, large companies operating in different jurisdictions often fiddle their books so as to report their income in low-tax places, and this will make it more likely that they will report in Ontario and pay Ontario taxes.

Maybe. As long as other jurisdictions don't do the same thing. This could become a “race to the bottom” where everybody tries to use lower taxes to attract industry from everybody else.

These measures are not so drastic that this is a huge concern. Figures in the Mintz report suggest that Ontario is a rather high-tax jurisdiction now, and that the measures will just make us a little below average.

There are many things I like about the plan. It reduces red tape for businesses. It removes some weird incentives caused by the patchwork exemptions in the current sales tax. It stops punishing companies when they invest in new equipment.

But we need to stop thinking of tax cuts as the solution to all our problems.

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