NCPA - National Center for Policy Analysis

GST HARMONIZATION: NOT SEXY, BUT SMART

March 13, 2008

Thankfully, Canada has a Canadian experiment from which to learn regarding the benefits of sales tax harmonization, says the Fraser Forum. 

In 1997, three Atlantic Provinces (Newfoundland, New Brunswick, and Nova Scotia), harmonized their provincial sales taxes (which were independent sales taxes) with the federal Goods and Services Tax (GST).  Professor Michael Smart of the University of Toronto examined the effects of harmonization in Atlantic Canada and made two important conclusions.

First:

  • After the 1997 reforms, per capita investment rose by more than 11 percent in the harmonizing provinces.
  • Total investment in machinery and equipment increased by over 12 percent annually above the level of investment that existed prior to the 1997 reforms.

Second:

  • There was almost no change in overall prices even though a whole set of goods and services were now subject to the harmonized provincial sales tax.
  • Specifically, consumer prices in the harmonizing provinces fell after the 1997 reforms, which somewhat offset the imposition of the sales tax.

Improving the investment climate, increasing the competiveness of the business development environment, and reducing tax compliance costs for business with little or no effect on consumer prices overall sounds like an excellent economic deal, even if it's not all that sexy, says Fraser.

Source:  Jason Clemons and Niels Velhuts, "GST Harmonization:  Not Sexy, but Smart," Fraser Institute, February 2008.

 

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