Trudeau would be wise to raise the GST to 7 per cent instead of reforming the capital gains tax

Posted on April 23, 2024 in Governance Debates

Source: — Authors: – Opinion/Contributors
April 23, 2024.   By John Lorinc, Contributor

While restoring the GST to 7 per cent would not be popular, such a move represents sound public policy and hearkens back to arguably the most consequential decision taken by the late Brian Mulroney, whose government first imposed this tax in 1991.

In the aftermath of last week’s federal budget, the Liberal government’s messaging about its renewed war on the housing crisis was eclipsed by fierce blowback from the tech sector, which took issue with Ottawa’s plan to hike taxes on capital gains.

This move, according to groups like the Canadian Council of Innovators, will stifle entrepreneurial activity, and therefore represents the public policy equivalent of an exploding cigar. The Liberals, in turn, insist that the affluent, who increasingly derive wealth from investments rather than income, need to pull their weight.

Lost in the clamour of this fight is any meaningful discussion of whether capital gains tax hikes represent an effective and sustainable public policy tool for providing additional revenues for a high-spending government.

I’d argue instead that Justin Trudeau’s Liberals should be reaching for something familiar and far more efficient — restoring the 2 per cent shaved off the GST by Stephen Harper’s Conservatives in 2008 — as a means of paying for its policy priorities.

There’s been a trend in the past two decades of governments microtargeting both new taxes and new tax credits. Harper deployed bespoke tax credits to win over specific demographics — e.g., parents with kids in organized sports.

On the other side of the fiscal ledger, municipalities have leaned on land transfer taxes to raise revenue from fluid constituencies (i.e., people buying homes) who don’t organize from election to election. The Liberals’ capital gains proposal falls squarely into this category.

While restoring the GST to 7 per cent would not be popular, such a move represents sound public policy and hearkens back to arguably the most consequential decision taken by the late Brian Mulroney, whose government first imposed this tax in 1991.

It is not an overstatement to say the GST has underwritten Canada’s social safety net for more than 30 years. In 2006, according to StatsCan tracking, the GST accounted for 30.6 per cent of all federal tax revenue, which made it a hugely important pillar in funding everything from health care transfers to defence spending.

By 2023, when the GST brought in almost $79 billion, that proportion had fallen to 24 per cent, largely because the Harper government cut it from 7 per cent to 5 per cent.

Harper sold both the GST cut and cuts to corporate tax rates as measures meant to boost economic activity and productivity. The reality is that neither outcome came to pass. Canada’s productivity continues to tread water despite those earlier efforts to buoy it. Yet, as Harper well knew, slashing what appears to most voters to be a sales tax makes good politics.

It is not, however, smart fiscal policy. The GST is a value-added tax (VAT) that replaced an unwieldy and counterproductive manufacturing sale tax. VATs originated in Europe in the 1970s and have spread around the world because their transparent structure (i.e., the use of input tax credits) prevents the “tax-on-tax” problem — i.e., sales taxes imposed on retail goods whose components have already been taxed at earlier stages of the supply chain.

VATs are generally lauded by economists as minimally distorting and they are also flexible: governments pursuing specific policy goals can choose to zero-rate certain categories of goods, as we do with groceries or, more recently, materials used to build affordable housing. And while they are not progressive like the income tax, VATs have relatively little impact on low-income households whose spending is focused mainly on zero-rated necessities.

So why aren’t the Trudeau Liberals selecting a proven policy tool to address the government’s shortfalls? The answer is simple: political expediency. With Pierre Poilievre’s Conservatives gunning for the carbon levy, Trudeau’s advisers would no doubt argue that a GST hike is akin to stepping on the third rail.

But they’re overlooking something we were all compelled to think about following Mulroney’s death earlier this spring. In the late 1980s, he pushed ahead with a deeply unpopular tax reform, but has been more than vindicated by history. Jean Chrétien fought and won the 1993 election pledging to kill the GST, but then didn’t, acknowledging its critical importance to Canada’s fiscal stability.

Thirty years later, Prime Minister Justin Trudeau and finance minister Chrystia Freeland have sought refuge in progressive populism with their plan to expand the capital gains tax.

But the sustainable policy choice would be to put those two points back on the GST. Mulroney, as Trudeau sermonized at his funeral, was a leader who made tough but important decisions. Now would be an opportune moment for Trudeau to follow Mulroney’s lead.

John Lorinc is a Toronto journalist and editor.

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