Werner's Blog — Opinion, Analysis, Commentary
The case for all-inclusive prices

In Canada and the United States, most prices are displayed net of taxes. Consumers have to figure out themselves how much they will end up paying. This means having to know or guess which taxes apply and at what rate, and which taxes don't apply. In Europe price labels are usually all-inclusive and consumers know exactly how much they pay at the till. Proponents of tax-exclusive pricing claim that this practice benefits consumers because it makes the tax portion more apparent. Of course, a less charitable view is that merchants prefer pretending that their goods and services are cheaper than they actually are. At the very least, tax-exclusive pricing is confusing to most consumers because it is often unclear which taxes apply. And some goods and services are indeed priced all-inclusive because there is a long list of taxes that apply—for example, for alcoholic beverages or motor fuels.

‘When you make a purchase, you should be clearly informed about the total price of the goods or services inclusive of all taxes and additional charges.’

Several provinces in Canada maintain their own sales taxes separate from the federal Goods and Services Tax (GST). Generally, provincial sales tax tend to have a lower tax base than the GST, and there are categories of goods and services that are exempt. Unlike the GST, which is uniformly set at 5%, PST rates can differ across different categories. British Columbia's PST, for example, is 7% for most goods, software, legal services, telecom services, and related services, but it is 8% for accommodation and 10% for liquor. While a small number of services are taxed, most are not—such as service in a restaurant. Some goods are PST exempt: all food for human consumption, energy products for residential dwellings, and fuel that is taxed separately. Also exempt are books, children clothing, bicycles, and a few other select items that need to meet specific criteria. Now remember all of that next time you go into a store to buy something. If the exact value of the GST and PST portions mystify you, you are not alone because it is usually not just 5%+7% on everything. Wouldn't it be better if you knew upfront what you will pay? In my opinion, when you make a purchase, you should be clearly informed about the total price of the goods or services inclusive of all taxes and additional charges

For some goods you will see some taxes included, and some not. What sense does that make? If you went into a BC Liquor Store before April 1, 2015, the prices shown on the products were all-inclusive. Perhaps as an April Fool's joke, BC implemented 3 changes to BC Liquor Stores [...] on April 1, 2015. If you walk through a BC Liquor Store today, you see prices net of the 10% PST and 5% GST. But you didn't think by any chance that the PST was 7%, or did you? Oh, and lest you think that 15% was all there was in taxes, the real liquor tax remains well hidden: the BC Liquor Distribution Branch Mark-Up. Brewers are required to add between $0.55/L and $1.08/L to their products, giving a small advantage to small brewers. If you buy a bottle of wine, you pay a 89% markup on the first $11.75 cost per litre and a 27% markup on any amount over $11.75 cost per litre. Confused? Need a calculator? You shouldn't. The complexity of our tax system should lead to one simple rule: show total prices, not partial prices.

Only motorists pay exactly what they see. According to the latest BC Ministry of Finance Tax Bulletin MFT-CT 005, motorists in Vancouver (the TransLink area) pay a federal 10 cents/L excise tax on fuel, plus 17 cents/L dedicated motor fuel tax for Translink, plus 6.75 cents/L dedicated motor fuel tax for the BC Transportation Financing Authority, plus 1.75 cents/L provincial motor fuel tax (general revenue), plus 6.67 cents/L carbon tax. The grand total is 42.17 cents/L. But that's not it. Add 5% federal GST on top of theses taxes and the cost of fuel. Now you really need a calculator. Thankfully, gas stations post the all-inclusive price. Now if figuring out total prices was always that simple.

Another case in point were airlines a few years ago. There was a plethora of charges that made it near impossible to guess the total price of a ticket. In 2008, the Globe & Mail's Douglas McArthur asked the pointed question: How does a $224 flight end up costing $826? With airport improvement fees, fuel surcharges, security charges, foreign passenger service charges, and other select taxes and duties, ticket prices were completely opaque. After a public outcry, airlines such as Air Canada have abandoned these practices. When you book a flight, you see the total price for each flight segment. Booking a typical low-cost flight from YVR (Vancouver) to YYZ (Toronto) was advertised today on the Air Canada we site for $331. The total price was eventually shown as $330.88, with $42.88 in taxes, fees and charges. That is transparent pricing. (Of course, air lines are now turning more towards selling add-on services, such as paying for each checked bag or on-board meal. That's a different story.)

There is a better way of doing business. Some countries have consumer protection laws that require prices to be correct and complete, thus ensuring price truth and price clarity—in other words, fairness and transparency. Germany has a separate Preisangabenverordnung (Price Labeling Directive), and Britain has a Price Marking Order 2004. The European Union has (since 1998) Directive 98/6/EC on "consumer protection in the indication of the prices of products offered to consumers". It defines the selling price as "the final price for a unit of the product, or a given quantity of the product, including VAT and all other taxes" and requires that "the selling price [...] must be unambiguous, easily identifiable and clearly legible." Canada has provisions against misleading advertising and labeling, but it does not require merchants to display all-inclusive pricing.

‘With tax-inclusive pricing consumers will be better off: their purchases will be better informed.’

Opponents of all-inclusive pricing claim that "hidden" taxes are a bad thing (Bird 2010), and some even think that value-added taxes are leading to more "big government" and make it easier to raise taxes. That argument is faulty: every invoice and every receipt will still show all the taxes included. The difference is that when you make a purchase decision, you base it on the total price. Arguably, as Chetty et al. (2009) have pointed out, consumers may under-react to taxes that are not salient. Posting tax-inclusive price tags reduces demand slightly. That means that tax-exclusive prices fool buyers into spending more than they intended. All-inclusive pricing is thus a matter of fairness and transparency. Some merchants will be less happy (and will oppose any move towards tax-inclusive pricing), but on balance consumers will be better off; your purchases will be better informed.

Further readings and sources:

Posted on Sunday, September 18, 2016 at 08:45 — #Economics
© 2024  Prof. Werner Antweiler, University of British Columbia.
[Sauder School of Business] [The University of British Columbia]