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When it’s a choice between two evils, choose neither

Appeared in Business in Vancouver
Release Date: September 21, 2010
As theologian Tryon Edwards famously said, “Between two evils, choose neither.” That is certainly the case when choosing between a repeal of the HST and an increase in the minimum wage. Despite the rhetoric of proponents, both choices would leave British Columbians worse off.

Start with the HST. As we note in our recent study Countering the Myths Surrounding British Columbia’s Harmonized Sales Tax, if the BC government is going to collect a 7% sales tax, then the HST is the least economically damaging way of doing so. The reason being: the HST, unlike the PST, strictly taxes consumption.

The most damaging aspect of the old PST is that it applied to business inputs (i.e., things that businesses use to produce goods and services) in addition to many of the goods that consumers buy. Most critically, the PST applied to inputs such as machinery, equipment, and technologies (i.e. computers and software).

As a result of paying sales tax on inputs, the PST increased costs and made it more expensive for businesses to invest, expand, upgrade and innovate. To that end, the PST discouraged business investment which is critical to our continued prosperity.

The HST, on the other hand, only applies to the final goods and services sold by a business. In other words, all business inputs are exempt from the HST.

By eliminating the sales tax on business inputs, the HST significantly lowers the cost of business investment in BC. Ultimately, this will spark more business investment in the province, boost the productivity of workers, and increase our living standards.

With regard to the minimum wage, if doing what’s best for the economy and BC workers is the goal, then increasing BC’s minimum wage is another evil that should be avoided.

For starters, the typical minimum wage earner is not an adult supporting a family, as suggested by advocates of higher minimum wages. Most minimum wage workers are actually young people, often students living at home with family.

Statistics Canada data indicate that 5.2% of workers in Canada earned the minimum wage in 2008. Of these, 63.4% were between 15 and 24 years old, and 87.3% of those individuals were living at home with family. Many of the remaining individuals earning minimum wage in Canada were adults supplementing their family’s income during the
child-rearing years or after retirement. So, changes to the minimum wage are most likely to affect younger workers, not working adults or those supporting families.

As important as who earns the minimum wage are the negative effects of minimum wage increases. The most damaging effect is that they result in higher unemployment, especially among young and low-skilled workers. This is because increases in the minimum wage raise labour costs for employers who respond by reducing the number of employees and/or the number of hours their employees work.

Studies from Canada and around the world demonstrate convincingly that higher minimum wages lead to lower employment levels. One recent comprehensive study by renowned minimum wage experts Professor David Neumark of the University of California and Dr. William Wascher, a US Federal Reserve Board economist, reviewed more than 100 studies covering 20 countries over the past 15 years and found that the “overwhelming majority” of studies, especially the most credible, consistently show that minimum wage increases result in decreases in employment.

Closer to home, 14 studies that specifically examined the impact of minimum wage increases in Canada found that a 10% increase in the minimum wage is likely to decrease employment by 3% to 6% among workers aged 15 and 24.

If groups like the BC Federation of Labour had their way and the BC government instituted a 25% increase in BC’s minimum wage to $10 per hour, then the province would shed upwards of 52,000 jobs for young workers based on estimates from a recent Fraser Institute study, The Economic Effects of Increasing British Columbia’s Minimum Wage.

A choice between killing the HST and increasing BC’s minimum wage is really no choice at all; both would greatly damage economic prosperity in BC.