A profound tax reform

Prince Edward Island's decision to harmonize its provincial sales tax with the federal GST next year will bring Canada's smallest province huge benefits; consumers and businesses will reap the rewards. While services will be taxed higher, the removal of PST on purchases of goods and services used in operations will keep more money in consumers' wallets as lower production costs cascade from business to the general public. Businesses, faced with a lower cost of capital, will have the chance to increase investments by around $560 million over seven years. Further, the HST regime's potentially more neutral treatment of economic activities will minimize distortions by promoting the efficient allocation of capital. By 2021, when the harmonization has been fully implemented, PEI's effective tax rate on new investments will have fallen by 18 points, making the island one of the most competitive economies in the OECD. Businesses of every size will gain enormously from the changes, as will Prince Edward Islanders themselves, in the form of more jobs, $380 million in additional wages and dramatically improved opportunities. This brief paper models the effects of the HST's gradual phase-in on all major sectors over the next seven years, and argues forcefully that PEI's course is the correct one - a major step toward the neutral corporate tax structure Canadian prosperity depends on.