It’s time for an adult discussion about HST/GST

Posted on September 16, 2011 in Governance Debates

Source: — Authors:

TheGlobeandMail.com – report-on-business/economy/economy-lab
Posted on Friday, September 16, 2011.    Stephen Gordon

It is long past time that the NDP – and Canadian progressives in general – made their peace with the GST/HST and appreciated its potential for reducing poverty and inequality.

The following dialogue fairly characterises the interaction between economists and progressives on the topic over the past 20 years:

Progressive Person: How do we raise the tax revenues we need for the social programs we want to implement without tanking the economy?

Economist: Consumption taxes. Theory says that value-added taxes (VAT) such as the GST/HST are the least-disruptive way of generating tax revenue, and available evidence is consistent with the theory.

PP: But consumption taxes are regressive!

E: Yes, but we can correct for that using targeted transfers to low-income households so that they aren’t worse off; that’s what the GST/HST rebate is for. And there will still be lots left over to fund those social programs.

PP: But consumption taxes are regressive!

E: I know. But they introduce fewer distortions than the alternatives, and we can recompense low-income households for their lost buying power.

PP: But consumption taxes are regressive!

E: I’m not disputing that point, but there’s more to the analysis than that. Okay, let me explain the effects of the various forms of taxes…

(20 years later)

E: …and so we see that a consumption tax accompanied by direct transfers to low-income households is the most effective way of generating the tax revenues you want.

PP: But consumption taxes are regressive!

This is a frustrating state of affairs for an economist who would like to see governments do more to reduce poverty and inequality. Outside Canada, it is generally accepted that high VAT rates are an essential component of social policy: see the accompanying graph. Of the 21 OECD countries that spend more on social programs than does Canada, 19 have higher VAT rates. There are no rich countries that have pulled off the trick of sustaining high levels of social spending with low VAT rates.

vat_1320585cl-6.jpg

< vat_1320585cl-6.jpg >

Concerns about the regressive nature of the GST/HST can be addressed by improving the system of credits that compensate low-income households. Indeed, research suggests that the most effective way of reducing poverty and inequality is – surprisingly enough – to provide low-income households with more money. (See, for example,hereherehere and here.)

One of the more convenient features of the GST/HST is that it has already set up the infrastructure for transferring income to low-income households. The GST/HST tax credit can be used as a basis for an even more ambitious system of transfers at almost no additional administrative cost. All that is required is the political will to use it.

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One Response to “It’s time for an adult discussion about HST/GST”

  1. Charlene Sylvestre says:

    This article brought to my attention the positive aspects of the GST/HST tax and its part in reducing poverty and inequality, including the promotion of monetary conservation. Prior to reading this article I was unaware of the benefits towards social programming gained through consumption tax or sales tax. This article makes it clear how sales tax will benefit our low income families in the long run by having more social resources available to them.

    Consumption tax will raise the cost of consumables for low income families as well as non low income families. I don’t believe this to be regressive because it is an effective way of building government revenue to go toward social spending; assuming that is what it will be used for. Also the GST/HST rebate can somewhat compensate those low income households for the income lost to sales tax, and also in the long run with more social programming available.

    Sales tax is a more direct approach towards reducing poverty and increasing social spending then other approaches because it creates a system in which funds are returned directly, as well as indirectly, through things such as GST/HST tax credit, and the creation of new or improved social programs. Also sales tax promotes conservation throughout all our citizens, which is another positive aspect for getting Canadians out of debt.
    A consumption tax has so far been one of the most productive forms of gaining revenue for building and sustaining social programs. This has been shown through several other countries with high social spending also having higher value-added tax rates.
    Although no one likes paying taxes, they are a necessary part of our country, in order to reduce inequality and poverty amongst Canadians. With more and improved social programming this will prove true for most citizens.

    Charlene

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