Sunday, March 29, 2009

Taxing Together in Perfect Harmony

The PST and GST seem like similar sales taxes to the average consumer. Aside from which items are exempt there is a huge different in the way they are structured.

The PST is a tax on a goods sold. Items that are considered basic needs are exempt from this tax. If a business is buying a product for resale they are exempt from paying PST on the purchase. The exemption must be applied at the point of sale. Their is no mechanism to recuperate over payment of PST.

GST is a general tax on everything. The cost of basics is factored into a tax credit that is distributed based on income. The big difference is businesses can use GST collected to pay for their GST expenses, with only the balance going to the government. This can help with a companies cash flow. In general as long as a business is profitable, their customers will be paying all of their GST expenses. It is a much more favourable system for businesses.

When the Federal Government was implementing the cut in the GST from 6% to 5%, it was suggested that the Ontario government should harmonize their PST with the GST. The PST would be collected by the Federal Government and follow the same rules as the PST. It would have the benefits of less bureaucracy with a single tax collector plus businesses who want to upgrade their equipment. The draw back would be the numerous items that are not subjected to PST would be subjected to the harmonized tax.

Although the Ontario Government did not want to admit it, the economy was already showing signs of decline. Harmonization could help out the struggling manufacturing business by allowing them to upgrade their capital equipment with the new tax break. They also had the opportunity to use leverage to exchange support for the GST cut with the Federal Government agreeing to waive the GST on some items that are already PST exempt. At the time the Government decided it was not a good idea and passed on trying to take advantage of the opportunity.

Last week the Ontario government announced the budget with the plan to implement a harmonized sales tax. They will get all of the benefits as stated above. The cost of some items that were considered basic in Ontario will immediately rise 8% to reflect the new tax structure. The government is giving out cash to try to ease the burden of the tax increase. They would have been in a much better position if they choose to make the same decision earlier. This is a missed opportunity that Ontario tax payers will keep on paying for.

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