TAX NEWS - June 2010

Canada Tax: StatsCan report on new tax's effects is highly credible, economists say

A Statistics Canada report on the effects of the HST is highly credible and much more transparent than a rival analysis by a right-wing think thank, economists said Tuesday.

The Times Colonist published a report Tuesday generated by StatsCan's social policy simulation database and model for the newspaper. The model has been used by federal and provincial governments, universities and a range of interest groups and companies. It was used, for example, by the government to cost out the impact of changes to the Income Tax Act.

That same day, the Fraser Institute called the report "flat-out wrong," claiming there was a "calculation error" in the newspaper analysis.

But Iglika Ivanova, an economist with the Canadian Centre for Policy Alternatives, said the StatsCan model is the one "governments use to run their own calculations when they are proposing new taxes. This is the state of the art."

The chief discrepancy is between the figures the Fraser Institute and Statistics Canada used for the change in the sales tax paid by consumers.

The Statistics Canada model uses a figure of $1.5 billion, which is based on a database that includes the research body's Survey of Household Spending in B.C. It reflects the dollars households would pay at the till combined with any business savings that would be passed on to consumers, exclusive of capital purchases.

The Fraser Institute figure of $410 million is the net effect as calculated by the B.C. government in its March budget. It does include capital purchases by business and households and also includes exports, which are not paid by B.C. households.

Ivanova says the Fraser Institute's figure for extra taxes paid is too low and its figures for upcoming income tax reductions are too high.

It's not clear what the Fraser Institute is including in its calculations, Ivanova said. "The problem with their reports is that they are always so vague about how they did their calculations. It's really hard to try to replicate it."

The Statistics Canada report broke down the family categories more finely, she said. Each study tried to figure out how much sales tax will be paid by families.

"It looks like the (Fraser Institute's) estimates of the sales tax (paid) is also completely out of whack," Ivanova said.

The Fraser Institute estimates that families pay very little HST seem too low, "And they don't explain why," she said.

Herbert Schuetze, an economics professor at the University of Victoria, concurred.

"Sorting out exactly what is going on in the Fraser Institute model is very difficult," he said, calling the methodology "cryptic."

It appears to be done using more aggregate data while the Statistics Canada study "seems to be more micro-based."

Schuetze said each report, when describing the average change to provincial commodity taxes, does so as a net effect. That includes two components: The additional amount we will pay in sales taxes and any reductions that are passed on to consumers in price.

"I don't see those two things independently so it is difficult to make any comment about how much is actually being passed through in each of them and whether that in fact is leading to the difference in the estimates," Schuetze said.

The question is how much is passed through to consumers, he said. "The bottom line is we are being asked to pay more money in terms of tax, with the promise that some money may be returned to us in the future in terms of pricing."