An HST referendum ballot collection box sits on a table at an Elections BC collection centre last month.Rafal Gerszak
Frances Woolley is a professor of economics at Carleton University, where she teaches public finance
The HST is a highly visible tax. According to the standard undergraduate textbook, Public Finance in Canada, that's a good thing: "…it is generally agreed that visible taxes are preferable to hidden taxes…. Most economists view the visibility of the GST as one of its beneficial characteristics."
The alleged advantage of visible taxes is better policy choices. Supposedly, if people know how much they are paying in taxes, they will be able to make informed decisions about how much government spending they are prepared to support.
Making taxes visible might be good economics. But it's certainly lousy psychology.
Behavioural economics research consistently finds that people are averse to losses. Yes, people like receiving a $50 cheque in the mail, but they really hate having to pay an extra $50 at the cash register. Over all, some people have gained from the introduction of the HST. For example, university students who don't spend much, but still get an HST refund cheque, are now better off. Some people have lost out, for example, people who spend a lot of money on the services that were tax-exempt under the old provincial sales tax. And some people are no worse off than they were before the HST was introduced.
But when people weigh losses more than gains -- when they care more about paying an extra $3 for a hair cut than getting an HST refund cheque -- even people who gain from the HST might still oppose it. The losses register, the gains don't. That's why visible taxes are lousy psychology -- and bad politics.
I'm not even convinced that making taxes visible is good economics. The crucial point is that when it comes to taxes, what you see isn't always what you pay. For example, suppose you pay $700,000 for a new home in the Fraser Valley. After the BC new housing rebate, $57,750 in HST will be added to the price of your home. That's what you see. A visible tax of $57,750.
But $57,750 is not a good measure of a new home buyer's true tax burden. To figure out how much more you are actually paying as a result of taxes, you need to know: what would the new home have cost in a world without HST?
In fact, without the HST, the before-tax price of a new home would almost certainly have been higher, for two reasons.
First, before the HST was introduced, construction companies had to pay provincial sales tax on many of their inputs -- and passed some of those costs onto consumers. The HST isn't a straightforward tax increase. Instead, it substitutes a visible tax -- the HST -- for a tax that consumers couldn't see -- the PST that companies paid on their equipment and some other goods and then built into the price of new homes.
Second, people in the Lower Mainland can only afford to pay so much for a new home. The introduction of the HST increased the after-tax price of homes, giving property developers a choice: keep the before-tax price the same, and shut some people out of the market, or lower the before-tax price, and continue to sell homes. The basic economics of supply and demand predict that the introduction of a tax on new homes creates downwards pressure on the before-tax home price.
When prices change as a result of taxes, the burden of the tax is shifted. As a general rule, taxes are shifted to those who can't move, or change their behavior, in response to the tax. In the new homes example, that would be the original land owners. They can't move their land. They can only hold onto it, or sell it for the most that the market will bear. The point is: the visible tax is on the new home buyer. But the person who is made worse off as a result of the tax might be someone else, for example, the owners of prime Fraser Valley real estate.
Economists are overwhelmingly in favour of the HST. The opposition the HST has encountered in B.C. should, therefore, cause us to re-think our support for visible taxes.
When a visible tax replaces an invisible tax, people may overestimate the impact of the tax change on their tax burden – and will therefore oppose the tax, even if the revenue is necessary to finance the goods and services, like health care and education, that the public wants.
Follow Economy Lab on twitter