The Case for Replacing British Columbia’s Inefficient Provincial Sales Tax with a Made-in-BC VAT

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The Case for Replacing British Columbia’s Inefficient Provincial Sales Tax with a Made-in-BC VAT
  • British Columbia’s Provincial Sales Tax harms business competitiveness and investment by taxing some businesses inputs, especially machinery and equipment, distorting consumer choices by taxing most goods but relatively few consumer services, and imposing high compliance burdens on firms because of its complexity.
  • As a result of the Provincial Sales Tax, British Columbia has the highest marginal effective tax rate (METR) on all forms of investment (25.6%) in Canada.
  • Imposing taxes on machinery and equipment means less investment, lower labour productivity, slower economic growth (in part as a result of a slower adoption of new technologies) and ultimately lower wages and salaries for workers.
  • Replacing the Provincial Sales Tax with a Harmonized Sales Tax or made-in-BC Value Added Tax would reduce the taxation of business inputs, especially taxes on machinery and equipment.
  • Based on econometric estimates of the tax sensitivity of investment, eliminating the Provincial Sales Tax on machinery and equipment would increase the per-worker stock of capital by 6.5%.
  • The resulting increase in labour productivity would increase average hourly earning by between 1.1% and 2.7%, increasing annual income per worker by between $700 and $1,700.
  • When provinces, including British Columbia, switched from a Retail Sales Tax to a Harmonized Sales Tax, there were only modest overall increases in consumer prices, in part because the Harmonized Sales Tax eliminated most of the tax burden on business inputs. Reductions in income tax and enhanced sales-tax credits can shelter most households from a decline in real incomes and in the long-run livings standards can increase with faster growth in wage and salary incomes from improved business competitiveness and investment.

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