In the mini-budget yesterday, the Harper government announced on January 1 it will cut the GST again from seven per cent to six per cent at an annual cost to the treasury of $5 billion. Almost every economist in the country thinks this is the wrong way to go.
The reason is simple. Cutting the GST does absolutely nothing for the over-all economic well-being of the country. While cuts in personal and corporate taxes (there were some of those yesterday too) tend to stimulate savings and investment, which is what an economy needs to become more productive and competitive, thereby raising living standards for everybody.
So why does the Harper government cut the GST rather than go for deeper income tax cuts that would benefit everyone? As Jeffrey Simpson says in the Globe and Mail: “Politics, pure and simple. The GST cut is the triumph of base politics over sensible economics.”
The brains around Harper have concluded a visible cut in the GST is more politically rewarding than a moderate cut in income taxes which many voters hardly notice. But the fact is th GST is a regressive tax. If you buy a moderately priced blanket, you’ll save about 26 cents. A person who buys a luxury car will save more than a $1000.
Simpson goes so far as to argue the most sensible tax policy would be to raise the GST back to eight percent, introduce carbon taxes to reduce emissions, and then offset these new revenues by deeper reductions in personal and corporate taxes to make Canada more efficient, competititive, fair and green.
Should Harper have cut the GST again?
Would you favour raising the GST back to eight per cent in return for lower income taxes?