Food tax: Adding GST to food will benefit the poor, economists say
TheStar.com – business
Published On Fri Feb 24 2012. Vanessa Lu, Business Reporte
Two Canadian economists are urging Ottawa to take a politically risky stand of adding the GST on currently exempt items including food.
They say the tax would help the poor while the current exemption adds to the income disparity by benefiting the well off.
But the idea of putting the sales tax on food angers advocates who say it would unfairly hurt low-income Canadians, further divide Canadians and make as much sense as “taxing air.”
Michael Smart of the University of Toronto and Jack Mintz, head of the School of Public Policy at the University of Calgary, said tax reform, if done properly, would actually help all Canadians, boost government coffers and spur economic activity.
Though exempting food was designed to preserve equity, Mintz and Smart argue rich households benefit instead because they spend a smaller budget share on food, but a larger absolute amount on it than the poor.
“You don’t just put a tax on food. You have to have offsetting,” Mintz said in an interview.
For example, with the added revenue from taxed food, governments might lower the sales tax rate to 2 or 4 per cent as well as increase the low-income tax credit.
In Canada, one-third of tax-exempt food is consumed by households earning more than $100,000 a year, he said.
“It’s a very expensive way to help low-income people by having a food exemption, because you’re giving a huge break to higher income people at the same time,” Mintz said, adding the only other OECD countries that don’t tax food are Australia and the United Kingdom.
“If you tax food, you could increase the low-income GST tax credit. They would get more money in their pocket, but you could lower the sales tax rate which would help middle income people, too,” he said.
Smart and Mintz estimate the federal government could raise $39 billion annually if it eliminated the exemptions that now exist on politically touchy items such as medicine, tuition, financial services and especially food.
Those new revenues can be used to cut income taxes, fund social services or both, or even to reduce almost in half the 12- to 15-per cent harmonized taxes consumers pay.
In Ontario, the HST sits at 13 per cent, which includes the 5 per cent goods and services tax, but if all exemptions were eliminated, it could be cut to 8.5 per cent overall, Mintz said.
At the heart of their argument is the Canada’s value-added tax — both GST and HST — have large exemptions, rebates and rate preference that reduce revenues and hamper productivity.
The issue of taxing groceries can be politically explosive, especially as food prices are rising and not expected to plateau any time soon.
When the GST was first proposed more than two decades ago, the Brian Mulroney government eventually backed off on the idea of taxing food because of the huge public uproar.
The research suggests Ottawa and the provinces are losing $8 billion a year in tax revenue on food, and even with giving lower income households tax assistance, net revenues could still rise by $1 billion a year.
Smart acknowledges it would be challenging given that “taxpayers respond negatively to highly visible sales taxes on day-to-day purchases like groceries,” so it might be better to call it a food tax rebate even if it were an income tax credit.
Any talk of taxing food enrages Debbie Field, executive director of FoodShare, a Toronto non-profit agency focused on ensuring residents have access to healthy food.
“All people of all classes need food to live and be healthy,” Field said. “Regardless of your income, taxing something that is at the basis of life is not a good social policy. It would like taxing air.”
She argues any sales tax would create barriers to accessing healthy food, prompting people to think twice about their purchases. As well, Field believes taxing food, and then offering tax credits to lower income Canadians, creates more division in society.
The Daily Bread Food Bank is also concerned about any proposal to tax food, arguing many food bank users already spend much of their income on rent and food.
“People with lower incomes would be disproportionately hurt by an added tax,” said Richard Matern, acting director of research at the food bank.
The food bank spent about $1 million last year on food, some of it at discount or wholesale rates, but any sales tax on these items would have an adverse impact on its budget, Matern said.
Finance Minister Jim Flaherty spokeswoman Mary Ann Dewey-Plante said: “We’ll review the report, but we’ve been clear that our government is focused on lowering taxes on Canadians – not raising them”
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