Monday, November 22, 2010

HST and lower prices

When BC Liberals decided that HST was the single best reward they could offer big business, they relied on loyalists such as the Fraser Institute and the BC Business Council for ringing endorsements. A few otherwise respectable academic economists joined the applause, talking about efficiency and avoidance of tax cascading.

The claim of HST supporters is that large tax savings enable businesses to lower prices. We can examine one example. Taseko Mines Limited operates Gibraltar Mine, near Williams Lake, the second largest open-pit mine in Canada. Taseko, like other manufacturers had already been relieved of paying provincial sales tax on production equipment but they still paid the tax on legal fees, liquor, limo repairs, office chairs, copy paper, brooms and other payments. Under HST, Taseko now gets back all that money previously paid as provincial sales tax. That has allowed them an opportunity to lower prices. Not required them to lower prices, but given them the opportunity. They said no.

This chart shows a six month recap of copper prices spanning the time when HST was made effective:
In the three months following HST implementation, Taseko's copper production costs were $1.40 per pound and the realized copper price was $3.76 per pound. Operating profit for the period rose by 86% compared to 2009.  It was a good thing they did not have to pay provincial sales tax. Had that been the case, their profit increase would have been a point or two smaller.

Clearly, producers selling at world prices don't pass through tax savings, they earn more profits. The price of oil in BC didn't fall because Shell Oil and others paid no sales taxes to Victoria.

A McDonald's Big Mac is $4.19 in St. John's Newfoundland where the restaurant pays starting wages of $10.25 per hour. In Vancouver, where McDonald's pays starting wages of $6.75 an hour, the Big Mac is the same $4.19. Strange. Don't lower costs mean lower prices?

My spouse needed to replace her car's keyless entry remote. Here is what she was quoted.
  • Canadian Mazda dealer, price $199
  • KeylessRide, American based provider of remotes, price $39
The point I've made repeatedly at Northern Insights is that lower costs result in lower prices only when competitive pressures ensure the pass through. Canada has very limited competition in many sectors, particularly in manufacturing and distribution. That has kept prices high in Canada, something particularly noticeable during times when the Canadian dollar is near parity with the USD.

Notice that economists and lobbyists are quick to promote policies that assist big businesses but almost never talk about the need for more effective competition in the markets. The Fraser Institute believes that every economic decision should be market-based but they don't publish papers about improving competition. Their belief is in markets free of government regulation, not free of monopolies.
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4 comments:

  1. The Fraser Institute : i would like for them to publish their funding sources. Unabridged.

    ReplyDelete
  2. Norman: That's why I say "free enterprise" is a misnomer. What the FI and their ilk really are promoting is private enterprise. We've got ours, now back off.

    mr perfect

    ReplyDelete
  3. Their belief is in markets free of government regulation, not free of monopolies

    Precisely. Excellent observation.

    ReplyDelete
  4. BC is a province of natural resources. What benefit do the BC people realize from the HST? BC's HST goes directly to Harper, as was prearranged. I don't buy copper pots, or anything made of gold. Our gas prices are sky high. Our hydro, is going up to 33%. Home heat has gone up. Where is the benefit. What the HST has done is, drive costs through the roof. Hansen said revenues were down. Between the provincial budget tax hikes and the HST, on pretty much everything, far too many BC people, don't have enough money to live on. Department stores, are losing a lot of money, some as much as 61% in losses. Restaurants are failing, bakery's, even liquor stores profits are down. We have no money, to support any businesses, so of course, tax revenues are down. It's Campbell and Hansen's stupidity at fault. Business is going to the USA, hundreds of BC people shop there. I bought my x-mas gifts at craft fairs. I buy chickens, eggs, other meats, and vegetables through the underground. Businesses collude and keep prices high. To hell with fair market prices, there aren't any.

    ReplyDelete

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