The GST, hated by many, stands the test of time

TheGlobeandMail.com – news/opinions/opinion
Published Jan. 7, 2011.   Jeffrey Simpson

Twenty years ago this week, Canadians settled uncomfortably into life with the goods and services tax.

The GST went into force on Jan. 1, 1991, reviled in its time and still not very popular (What tax is?). Yet, the GST proved to be a wise move by Brian Mulroney’s government. That the tax has stood the test of time underscores its utility.

Last week, Mr. Mulroney told The Canadian Press: “Quite frankly, it’s interesting to me to sit back many years later, having had to endure the abuse and recriminations and the pounding, and to see that it’s turned out well for Canada. That’s all I wanted.”

Fair enough. The durability and effectiveness of the GST give Mr. Mulroney the right to feel vindicated. The GST helped improve the competitive position of Canada’s economy. It proved to be a hardy source of revenue for the federal government. It also allowed the lowering of personal and corporate taxes. And a GST tax credit helped to cushion the blow for low-income citizens.

The shift from income to consumption taxes is endorsed by most economists, because it encourages savings and investment. Last month, economists at the Organization for Economic Co-operation and Development issued yet another report urging a further shift toward consumption taxes, recommending “that countries consider raising additional revenues through broad-based taxes on consumption.”

One economist (sort of) bucks the worldwide wisdom, but, then again, Prime Minister Stephen Harper is a politician. His government slashed the GST by two points in an “all politics all the time” move that cost it $10-billion to $12-billion in revenue, the biggest single reason for wiping out the surplus bequeathed by the Chrétien/Martin Liberals.

The GST cut to 5 per cent leaves Canada with the lowest national consumption tax (with Japan) among countries with one. If the United States had the courage to implement a 5-per-cent sales tax, it would take a big step toward restoring fiscal sanity to the country. But, of course, the politics of imposing a visible national sales tax is always hard, as Mr. Mulroney discovered.

His government first proposed a 9-per-cent GST. The tax itself, and the rate, created howls of opposition. But dropping the rate to 7 per cent caused a loss of almost $6-billion – money the government found largely by raising surcharges then in place on personal and corporate incomes. The government also scuttled its plan to drop the income tax rate to 25 per cent from 26 per cent. Lower income taxes came later when the deficit was licked.

The alternative of a 5-per-cent rate was explored, but such a rate would have required taxing food, books and some other goods. When that option was deemed too politically toxic, the government settled on 7 per cent.

The opposition Liberals screamed and promised to find a replacement for the GST. They never did, although they scored political points for their brazen promise. Two Conservative MPs resigned from caucus. Mr. Mulroney hustled to appoint eight additional senators to overcome Liberal opposition in the Red Chamber.

A belief that the GST would inevitably be increased proved wrong. The rate went down, courtesy of Mr. Harper’s political calculation, or what Mr. Mulroney described in the CP interview as “good politics and very bad policy.”

Today, no political party and no economist would wish to return to pre-GST days, bringing back the 13-per-cent manufacturers’ sales tax, an export- and job-killing tax. But no opposition party has the guts to promise a return to 7 per cent (or higher), with the additional revenue (roughly $6-billion for every GST point) used to reduce personal and business taxes and/or to spend on needed national programs.

That would be the correct economic prescription, but since Canadian politics doesn’t encourage serious debate about hard policy options, the GST will remain at 5 per cent for the foreseeable future. The GST is a visible tax; personal and corporate income taxes aren’t. That’s the only reason the Harperites chose to reduce the tax.

Mr. Mulroney suffered politically for introducing the GST. He was brave and right. He must be miffed to see a successor play with the tax for political gain

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