Cutting the GST is Good Politics, Bad Policy

8 comments

1. It’s a highly visible tax cut, however. It would have been far better to take that 1% off of income tax, however, if you are truly trying to reward the Canadian populace with tax cuts.

2. Cutting the GST is folly. Having a low income tax rate for individuals and small businesses helps retain skilled workers and seed capital for small businesses. I was against the GST when it first came out, but I’ve since invested time in studying taxation policies and outcomes. Value-added taxes make way more sense than increased income taxes.

3. I wonder if the GST cut is also an attempt to mollify the provinces. Cutting the GST does not directly affect the provinces, but since provincial income tax is a “tax-on-tax”, cutting federal income taxes would directly affect provincial bottom lines. I can imagine how that would go over.

4. Value-added taxes make way more sense than increased income taxes.

   Why so, Andrea? I’d think that low and middle-income people are treated less fairly by a VAT than by income tax.

5. If you rebate all or a portion of VAT for low- and middle-income earners, the VAT shifts to progressive taxation of higher income earners, specifically those that buy a lot of luxury goods.

6. Yeah, it’s a real visible and popular tax cut, and the government is clearly in vote-buying mode. It’s remarkable how the consensus in favour of income tax cuts was string amongst any hafways-respectable economist. (The guy from the taxpayers’ federation isn’t an economist so much as a political activist.) The research on this is pretty solid; I’ve done a fair bit of reading on the subject and simply put, our income tax rates are somewhat high and cutting them would be good for competitiveness and investment, while our sales tax rates are quite low by world standards and changing them a little bit this way or that won’t do much to change the climate here. Hell, I wouldn’t mind raising the GST a point and using the tax room to do something like increasing the threshold for each tax bracket.

   Buried deep in a federal finance department study form late 2002 or so was a bit of modelling that studied how much “economic well-being” would come about from various tax cuts given the situation in Canada. Stuff like corporate capital tax cuts were the big winners; amongst the taxes most of us mortals pay, income tax cuts gave three times the economic bang-for-buck of an equally pricey VAT cut. That’s not to say that the most efficient tax cut is always the way to go, but it’s a consideration. (The Liberal cuts weren’t the most efficient on paper, but they also benefitted the less well-off more than most income tax cuts; that’s another consideration to weigh, but more on that below.)

   Some of you may recall that the provincial government raised the PST to 7.5% for a few years. I can’t recall a single incident during time where the extra half-point caused me to hold off on a purchase. (I mean, really — ten or fifteen bucks on a bunch of computer gear?)

   j: Provincial tax is no longer keyed to federal tax for most Canadians (BC, AB, SK, ON, and QC all set their own rates and brackets; there may be others), so I doubt that impacting provincial treasuries were a consideration.

   dpu: To save more from the GST cut than you would from a 1% cut to the bottom rate, you’d have to spend in the tens of thousands annually on GSTable items. Low-income folks put more of their income towards rent and food, and those are expenditures that they won’t save anything on. The combination of a $500 increase in the basic exemption and lowering the bottom rate was worth about $190 to someone earning $20,000/year, topping out at around $325 at $36.000/year. Aside from big-ticket items, someone earning $36.5 isn’t going to spend $32,500 a year on things subject to the GST, but someone earning two or three times that probably will. So it wasn’t just a matter of economic efficiency; the tax cuts the Tories scrapped were actually aimed straight at those with lower incomes. Higher-income earners still would have benefited, but it was the same cut someone at the top of the lowest bracket would have had.

   (shorter IK: I agree with Darren, at very great length)

7. Andrea and Ian, thanks, that clears it up.

8. Of course, the effects of the GST cut are completely lost to the poor, given that they have a .5% tax INCREASE in the same budget, and have a reduction in the basic personal amount they can claim (before leaving office, the Liberals had raised it).

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