Madam Speaker, the Minister of Finance has asked this House to approve the blended tax deal he has made with the Atlantic provinces. The Reform Party opposes this legislation on several grounds.
First, it does not fulfil the election promise to kill the GST. The red book fine print may have hedged on this issue but the impression left with the public was quite clear. The Liberal Party had been in a historic fight with the Conservative government's Brian Mulroney against the GST. With such a fight under its belt, it would use the opportunity of being in office to scrap the hated tax. The resignation of the Deputy Prime Minister and the parliamentary protest actions of the members for York South-Weston and Broadview-Greenwood support this view.
Second, the blended tax deal comes with too high a price tag for the rest of Canada. Why should taxpayers outside the Atlantic provinces pay nearly $1 billion to the governments of those provinces which have voluntarily agreed to go along with the federal government's plan? They have no moral right to be compensated for an action which was essentially voluntary. It is quite clear that the transfer was a political bribe by the federal government so that it could pretend that it had begun to deliver on its election promise to scrap the tax.
Third, the blended tax does nothing to get rid of the fundamental flaws of the GST system as enacted by the Mulroney government.
As an economist, I was a strong supporter of the policy that would replace the manufacturer's excise tax by a value added tax. The latter promised to eliminate the cascading of taxes, distortions between industry's prices, be good for exports and leave a paper trail that discourages tax evasion. However, the value added tax
which eventually emerged from the Conservative's deliberations as the GST fell far short of the ideal found in academic studies of such a tax.
The most serious problem stems from the failure to apply the tax to the broadest base possible. Once the political decision to exclude food had been reached, a Pandora's box of other exemptions and so-called zero rating became subject to successful political lobbying.
The result is a special treatment of the so-called MUSH sector covering municipalities, universities, schools and hospitals which are exempted from the tax. Doctors and professionals are zero rated which means that they do not charge the GST, but they do not get a rebate on the GST they paid on the materials they bought while providing their services.
Hearings by the finance committee produced many stories about the nightmarish complexity and administrative costs of the GST in general. These stories went from the inequity of having five doughnuts taxed because they are assumed to embody food service delivery, while six doughnuts are not taxed since they are pure food, to the false incentives implicit in the taxation of garbage collection services delivered by a private firm and non-taxation of municipal garbage collection services. Imagine what that does to the privatization of the often much more costly municipal garbage collection services.
From evidence produced by the witnesses, it is clear that the GST did not discourage but encouraged tax evasion. Firms in construction, in home, shoe and automobile repairs and a variety of other service industries that pay the GST face serious competition from many that do not. In addition, participants in the scam to defraud the GST are alleged also to be avoiding paying income tax.
One of the most dramatic presentations was by a witness who owned a business selling used goods. The GST has virtually bankrupted him primarily because of competition from used goods dealers that do not charge the GST. Similar stories were told by legitimate dealers in used cars. The notional GST return on used goods did not prevent the erosion of the nationally important legitimate trade in used goods and automobiles.
The paperwork involved in paying the tax and claiming rebates is very significant. For larger firms the day to day operations have reached a reasonable level of cost as a result of the intensive use of computers. For small businesses the cost remains high in spite of the government's willingness to accommodate the special needs of such firms.
In sum, all of these costs and false incentives of the Canadian GST system still affect the blended tax. In some ways they have become worse because of the need to integrate the provincial sales tax with the GST. The rates are higher, the incentives to evade are larger and so on.
Fourth therefore are the inequities resulting from the harmonization of the sales tax of individual provinces with each other and the GST. This harmonization produced a number of inequities.
Historically, provincial governments have used the sales tax to engage in social and economic engineering according to the demands of their electorates. This explains why some provinces exempt food, children's clothing, reading materials, some services and medical supplies from sales taxes while others tax such items, some at different rates from those charged in other provinces.
On top of this there were differences in the rates of taxation depending on how much money provincial governments had to raise by this method. Some taxed people and companies at different rates; some spent more than others; all of which determined the average provincial sales tax rate in the individual province.
The GST has a much broader base of taxation than the provincial sales taxes. Blending them therefore meant that provincial taxes had to be put on to many items of consumption that were previously untaxed. However this broadening of the tax base meant that provinces could raise the same amount of money at lower tax rates. This fact underlies the Liberal assertion that provincial tax rates are lower in favour of consumers. This of course is a shell game. By definition the average consumer pays the same with the blended sales tax as she did with the GST plus the provincial sales tax. Otherwise it would have been a tax grab and we would have heard the screams all across the country.
Averages hide a lot of variations in gains and losses to individuals under different circumstances. People who buy a lot of reading material may or may not make up the extra taxes they pay through reductions in the rates paid on other consumer purchases. People who find their tax obligations have increased are justified in complaining to the Liberals since they voted for the elimination of the GST, not a change which costs them personally.
A fifth reason Reform opposes the blended tax legislation is that the Liberals have claimed that the administration of the blended tax will result in substantial savings in administrative costs to governments and taxpayers. Returns have to be filed and audits only have to deal with one bureaucracy rather than two. Such savings are real. However the question arises as to how large these savings will be in
relation to the extra costs involved in switching to the new system and in the day to day operations.
As it turns out, one provision in the legislation has resulted in a significant increase in costs. I will discuss this briefly by describing the problem that it attempted to address. It is the so-called tax-in provision of the legislation.
This provision requires merchants to display all prices including the taxes paid and not show the taxes separately. This mandated tax inclusive pricing works very well in Europe. It removes many of the annoyances consumers experience when under the present system they are faced with a bill for their goods and services, often inflated unexpectedly much by the GST and provincial sales taxes whenever they reach the check-out counter. European shoppers became quickly used to tax-in pricing and merchants adjusted their operations quickly.
Many in Europe and in Canada had opposed the inclusion of tax-in pricing requirements in the GST legislation because of the fear that it would permit governments to raise GST rates of taxation surreptitiously without explicit consultation and the kind of openness and resistance which is brought when people are required to file their personal income taxes. According to the experience in Europe, it turns out that this fear was not well placed.
When the Government of Germany recently tried to raise the GST tax by one percentage point, it ran into a storm of opposition. In the end it was forced to drop the plan for this increased tax. I believe the same would occur in Canada.
It is for all these reasons that show an advantage of tax-in pricing that the Reform Party in its minority report to the study on the GST endorsed the tax-in pricing provision for a national sales tax. However, the problem is that we do not have a national sales tax. We have what has been called a blended sales tax in order to distinguish it from the national sales tax. In fact it applies only to four of the Atlantic provinces.
As it turns out, I have no doubt that there may be savings for individual retailers from having only one sales tax, the blended sales tax. I have not seen how big these savings are. Therefore I am not able to relate them to the kinds of costs the tax-in pricing provision has imposed on these retailers and which costs they are required to pass on to the consumers in the provinces which are subjected to this legislation.
What are these costs? There is the once and for all cost required of individual firms to switch their system of calculating the price charged at the till. This requires not only reprogramming computers, but it is very important that it also requires the retraining of the individuals serving the consumers. These once and for all costs may be justifiable in light of the savings on the other side by not having to deal with two authorities.
It turns out that there are also very large costs associated with day to day operations which will go on for as long as there is a blended sales tax in that region and the GST and provincial sales taxes in the other provinces. What are these costs?
According to an independent study by Ernst and Young, prices that have been attached to labels on goods manufactured, let us say in the United States or Ontario, to be marketed throughout Canada will have to be changed. Tags will have to be removed by hand and replaced on the goods that are being sold in that area. In some cases the price is printed on the good, such as on greeting cards the price is printed on the back at the bottom. Stores will have to relabel all of those cards.
Major retailers base many of their marketing campaigns on the use of flyers and house to house distribution of material. Right now the copy is prepared only once with the prices and conditions applying to all of Canada. In that particular region, special copies will have to be written and separate copies will have to be printed. It is a very serious increase in costs.
We should also note that warehousing and cost of distribution are expensive parts of retailing. Those of us who have never been in that business do not realize what it takes to keep the shelves filled with goods of the required size, quality, quantity and variety that consumers want. One problem is that the varieties, quantities and qualities are not predictable.
Retailers now have as an option that if in one region their sales have exceeded those expected and they require more goods from another region, they can go to the warehouse in another region and ship the goods to the area with the shortage. There will now be an invisible barrier at the edge of the blended tax zone which means they cannot get something from the other warehouses. The studies said that truckers who deliver goods in regions on either side of the invisible barrier may now have to shift the goods around in their trucks to get at those goods which have the appropriate label for the area. This is not a fantasy. This is not something made up. Some estimates are that these costs may be as high as $100 million for this region.
Let us say that half of it involves continuous costs every year. Who is going to pay those costs? The consumers in that region. Eaton's and other big national retailers cannot pass them on to the rest of the country because there is too much competition, forcing them to keep prices down, not allowing them to raise prices.
We believe that the very least the government can do in order to help the consumers of the Atlantic provinces is to postpone the
required tax in pricing approach until a blended sales tax or a national sales tax exists throughout the country.
In the meantime, however, there are so many flaws in this bill and in this approach to replace the GST that I believe Reform is acting in a socially responsible manner by opposing it.