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OP-ED: Proposed tax change isn’t a ‘hike’

By Rod Hill

“Taxes are the price we pay for a civilized society,” American Supreme Court Justice Oliver Wendell Holmes wrote 100 years ago. When a country can no longer have an adult conversation about taxes, is its civilization in danger? We had better hope not, because that seems to be the situation in Canada now.

I’m not referring to last year’s campaign of disinformation surrounding the federal government’s attempt to reduce tax avoidance by the owners of private corporations. Nor am I referring to governments that pretend to care about reducing greenhouse gas emissions while lacking the courage to introduce even the most minimal carbon tax.

My concern is the nonsense being foisted on the public about the federal excise tax on beer. A sad example was the editorial “Permanent Escalator to Taxes” (Jan. 23).

It correctly states the facts and then promptly misinterprets them.

Last year’s federal budget did indeed raise the tax on beer by 2 per cent (about the rate of inflation) and it “decided to pass legislation building a constant increase to the tax, an increase tied to the consumer price index,” as the editorial notes.

It goes on to describe this as “a sneaky way to increase taxes without actually having to tell anyone you're doing it.” The legislation is “institutionalizing tax increases,” camouflaging them, with consumers paying “constantly increasing” amounts to the government. It concludes with “When a government increases a tax, it has to justify that increase.”

In fairness, the editorial writer was simply echoing the false arguments that have been made since last spring when the budget changes were announced. More on that later.

If it’s not obvious already, let’s see what’s wrong with the claim that the tax is going up and up.

First, a bit of background. The federal excise tax on beer is set in dollar terms per hundred litres of beer. The tax varies with the amount of alcohol in the beer and, importantly, offers very substantial reductions to smaller breweries that face higher costs of production compared with large industrial operations.

Large breweries currently pay 15.9 cents per 500 mL bottle of beer with alcohol content of more than 2.5 per cent. (Smaller breweries pay anywhere between 1.6 cents and 13.5 cents, depending on their annual production.)

The tax will rise on April 1 at the same rate as the prices of goods and services generally, as measured by the consumer price index. If that is 2 per cent (the middle of the Bank of Canada’s inflation target), the tax on that bottle will rise to 16.2 cents.

Is this a “tax hike”? No, because to pay that tax on your bottle of beer you don’t have to give up any more of the other things that you could have bought instead. On average, their prices rose by 2 per cent as well.

In the terminology of economics, the “real” cost of the tax is unchanged. The change in the dollar value of the tax has not raised its real cost. Confusing the two is what economists call “money illusion.”

  1. your wage rises by 2 per cent, are you better off? If the prices of the things you by also rose by 2 per cent, your “real wage” is unchanged.

Exactly the same thing is happening if the tax on beer is indexed to inflation: the government collects the same real amount per bottle of beer.

How does the current tax compare with what it was in the past?

Adjusted for inflation, the tax on a 500 mL bottle was 19 cents in 1976, 18 cents in 1987, 19.5 cents in 1999. At just under 16 cents, it is the lowest it’s been in 40 years. Last year’s budget will keep it at that low level into the indefinite future.

But the facts don’t matter.

Last spring, the Senate responded to the uproar about the inflation adjustment to the beer tax. The Chamber of Sober Second Thought (as John A. Macdonald called it) became drunk with delusions of power and attempted to strike this from the budget, but without success. (The House of Commons has ultimate authority over budgets.)

According to one report, “a number of senators expressed concern that the automatic yearly tax hikes would potentially devastate many small Canadian breweries and wineries.” Finance Minister Bill Morneau had already explained to them that the adjustments involved no real increase, but to no avail.

Beer Canada, the industry’s trade association, has recently launched a campaign to stop the upcoming inflation adjustment. It is pretending that this will leave beer drinkers "faced with higher prices because of higher taxes. That's not favourable for sales," according to Luke Harford, the association's president. "Brewers are going to be left with less money to invest in their plants, their people and their communities – and that's not a good thing either." Its groundless complaints are being uncritically reported by the media across the country.

Oh well. On the bright side, new craft breweries are flourishing across the country. We can contemplate the shaky future of our civilized society over glasses of their fine products.

Rod Hill is a Professor of Economics at the University of New Brunswick.

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