SHOULD HARPER HAVE CUT THE GST?

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?

10 Comments »

  1. 1
    Tony Kondaks Says:

    No, I don’t think Harper should have cut the GST; he should have cut income tax and corporate tax rates.
    There is a movement in the US for the “FairTax” (fairtax.org) which calls for the total elimination of both the income and corporate tax and replace it with a nation-wide consumption tax, like Canada’s GST. Even the Democrat Warren Buffet supports this.
    I am an advocate of a flat tax but I am slowly being seduced by the concepts behind the FairTax.
    So, Harper’s move seems to be a move away from consumption taxes. It would be interesting to see if Canadians would also consider something like what is proposed here in the States.

  2. 2

    Tony:
    Thanks for your informative comment on the tax situation in the U.S. I believe Charlie Rangle has a tax bill moving through Congress. The initial beauty of the “Fair Tax” program would seem that it cuts through thousands of pages of complex tax codes to something the ordinary citizen can understand and might even deem to be fair. I should think Canadians would give it a look.

  3. 3
    Barbara Says:

    I am confused by your argument, Neil. The poor (who buy blankets and not luxury cars) may pay little or no income tax, yet they continue to pay the GST when they buy blankets and children’s shoes and winter tires. For the relatively comfortable, a cut in income tax is better because, if the GST is too high, they can always cut back on extras and luxuries. For the less affluent, a cut in the GST is of some help. Maybe there is something I do not understand.

  4. 4
    Paul Costopoulos Says:

    Fair tax indeed. No Income Tax but the welfare recipient, the pensioner on a fixed and unindexed revenue and the 100 000$ earner will all pay 23% or 30% sales tax on a litre of milk, a pair of shoes or a Lamborghini. But the poorer will stll be the worst for it because they can’t afford to pay more sales tax. At any rate those people are presently paying no or very little income tax and the necessities are not at this moment taxable. THE GENEROUS American fair tax would tax everything. A small revenue family, everybody would get an around
    400$ (for a family of 4) check to compensate for the tax on necessities wether they need it or not.
    But then to finance the Irak, and maybe Iran, war, by how much would the fair tax be majored, not refundable of course, lets be patriotic.

  5. 5
    Chimera Says:

    Why does it have to be either/or? Why not both?

    The federal and provincial (BC) governments have boasted surpluses in the past few years. That tells me that we’re being taxed at ‘way too high a rate.

    I say cut all taxes. Let the government go begging for money for a change, and impose economies on itself. I’ve had enough of having a surplus dangled over my head and being urged to “jump for it.”

  6. 6

    Barbara:
    Perhaps part of the answer is that yesterday the finance minister raised the shresh hold at which Canadians begin to pay taxes. Also the argument is that a cut in corporate and personal income taxes would stimulate the economy (thus creating more jobs for poorer people) in a manner the GST cut would not.

  7. 7
    Barbara Says:

    Raising the threshold at which Canadians begin to pay taxes is good. But those folks who did not pay taxes before stand to gain nothing from that. They gain a little by the cut in GST.
    Aren’t you quoting the US Republicans’ mantra about trickle-down economics? It did NOT work. The Canadian economy is comparatively strong these days and jobs will be created. Canada wins when the USA wastes its money waging pointless wars.
    The cut in corporate taxes was aimed at keeping companies from moving to places with lower tax rates. I suppose that is a good idea, considering the loyalty to Canada that many Canadian businesses have shown of late.

  8. 8

    Oops. I meant to say the finance minister lowered the thresh hold at which Canadians begin to pay personal income tax.

  9. 9

    Let me try to make that clearer. As of January 1 next year Canadians will be able to earn $671 more without paying personal federal income tax on it. In addition there will be a cut in the lowest federal tax rate from 15.5 per cent to 15 per cent.

  10. 10
    Thursday Says:

    Bear in mind that lowest rate cut reduces the increase the Conservatives introduced in their first budget.


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