We Should Raise the GST
September 19, 2009 · By Jonathan McLeod
Debates are raging in British Columbia and Ontario about the introduction of the “HST” (Harmonised Sales Tax). This would be a combination of federal and provincial sales taxes, similar to Quebec’s QST. The HST isn’t very popular. Opponents worry that it is ripe for abuse, and will result in an increased tax burden.
Stephen Gordon at Worthwhile Canadian Initiative disagrees and writes in favour of a harmonised tax:
The Charest government is floating the idea of increasing the QST – which has been harmonised with the GST since the very beginning – by another percentage point (in addition to the one-point increase announced in last spring’s budget) as a way of dealing with the post-recession deficit. This is clearly the right thing to do, and the Quebec Liberal government is to be congratulated for putting the proposal on the table. But what, you may ask, is the reaction of the PQ opposition?
PQ leader Pauline Marois said the government should hold off until the economy has stabilized.This is the proper concern to raise, as befits the duty of an opposition party. The idea is a good one, but it’s important to get the timing right.
On the specific issue of an HST, I can’t agree with Mr. Gordon. A harmonised tax hides the tax initiative of each level of government, making it more difficult for citizens to hold their politicians accountable. One of the great things about the GST (as opposed to the hidden taxes that it replaced) is that it is an in-your-face tax. If any government decided to tinker with it, we’d know; there could be no hidden shenanigans. But this is a little beside the point.
Currently, we have a ludicrous, inefficient tax regime that is, seemingly, built to confuse, confound and just flat out con taxpayers. The tax code is incomprehensibly complex, wasting time and money as taxpayers attempt to comply with a myriad of regulations. Further, the practice of excessive withholding leads to people overpaying, unfairly stuffing government coffers with money that rightly belongs to individuals.
Shifting away from our tiered, exemption-ridden tax system towards a flat (or flatter) and simplified system would be a boon to our economy. However, abandoning income-based taxation and moving towards consumption-based taxation would be even more beneficial. Consumption-based taxation leads to fewer market distortions, encourages investment and simplifies tax remittance procedures, essentially freeing private individuals of all transaction costs related to paying taxes. Since we already have the GST, the added transaction costs associated with tax payments for businesses would be negligible (especially compared to the savings accrued from a simplified tax code).
It has been suggested that a consumption tax of 30% could replace the income tax system. This would be a big shock for consumers, but, thankfully, they’d have more money in their bank accounts to pay these taxes. Even if this lead to fewer consumer purchases, money would (assuming we don’t just stuff all our extra cash under our mattresses) be funneled into savings and investment, spurring economic growth, and possibly curbing rampant consumer debt.
Even if we found this tax system to be too regressive, we could address that with basic transfers to those with lower incomes. The administration would be simpler than our current tax regime (as we already transfer wealth, and give GST rebates to those who qualify), thus the economic drag would be decreased.
No one wants to see a 30% tax added to every consumer purchase, but such a scenario would make people all the more aware of the level of taxation to which they are subjected. With accurate information, citizens could make more informed and rational decisions about tax policy than they do today. Even if people were to become numb to the 30% tax, the fact that it would be better for us by facilitating the expansion of wealth should be reason enough.
So.. who’s with me? Let’s raise the GST!
I think I speak for most Albertans when i say…. raise the GST?? Screw off!!! You have a problem with an HST then take it up with your respective provinces. We’re quite happy with things the way they are, thank you very much.
Hi bob,
So I want to understand: you’re suggesting that most Albertans prefer an inefficient, dishonest and punitive tax system that stymies investment and inhibits wealth creation? Good to know.
I know there are more Albertans around here. What do you all think? Do you prefer a complicated progressive income-based taxation over a sleek consumption-based system?
If your main concern with the current system is that it’s too progressive and complicated, why not just advocate a simple flat income tax?
If you remove income tax in favour of only a GST, you would be removing corporate taxes and shifting the entire burden to Canadian individuals paying the GST?
Also, would a very high GST not provide an overly huge incentive for bartering and other under-the-table transactions to avoid the GST? How would you police that?
Hi Dave,
Thanks for the thoughtful comment. I do support the idea of flattening and simplifying our tax code. And if we’re to keep the income-based taxation system in place, then you’re right, we need to fix it and simplify it.
I’m not actually too concerned about the effect on corporate taxation. In application, corporations don’t pay taxes, people do. Corporate taxes either take money away from individuals or take money out of investment and R&D. Assuming we stick with our current tax system, we should begin to debate the efficacy of corporate taxes.
Tax evasion relies on a risk/reward calculus. It’s true that there will be more incentive to avoid a 30% sales tax, but a wiser taxation policy that promotes (or does little to hinder) wealth creation should, in the long run, lead to people having more money, and, thus, less incentive to evade taxes (and with a simple tax system, there’s less opportunity for tax avoidance).
Still, I understand your concern, but I’m willing to risk a little bit of sales tax evasion to create a better tax system. And I submit that the losses accrued from increased black market activity would be outweighed by eliminating the economic drag that our current system produces.
The QST is Quebec is not “harmonised” and never has been. Although it applies to everything the GST does, it is a completely separate tax and is charged to the total including GST so consumers are taxed on top of tax!
Fair enough.
But I still have concerns about corporate tax. You are correct in that individuals are the ones who pay the tax in the end. But what about foreign corporations? If the profits are transferred out of the country, then there will be no individuals in Canada receiving the money to they spend and therefore pay GST?
Or what about the effect that a 30% GST would have on our tourism industry?
I’m sure one could create mechanisms to get around these problems, but then we’re introducing more complications to a system that we’re trying to simplify, and by the time we finish plugging every tax leak and fixing every unintended side effect we can think of, we will be right back to having a complicated tax system again.
Victorian – thanks for the clarification. Living in Ontario, I’m not that familiar with the QST (sure I spend money in Quebec sometimes, don’t I don’t pay a lot of attention to the taxation). I was relying on Stephen Gordon (whom I quoted), and figured as an economist living in Montreal he’d have his info straight. It’s good to attentive readers who can point these things out.
Dave – Good points. There are certainly drawbacks to consumption taxes, and my support for them wavers the more accommodations that have to be built in.
I know that this would be a radical departure (and I don’t think it would be a good idea right now with the current economy). I imagine that it’s something that we’d have to phase in, and maybe we’d never switch over 100%, but at least achieve better balance between the two types of taxation.
In the meantime, we should move towards a flat tax (and maybe eliminate things like payroll taxes). Our current system is punitively complicated.
cut spending drastically at all levels of government, make budget deficits illegal and enforceable by law, rid ourselves of consumption taxes and place a 20% income tax only with a larger portion of that going to the provinces. you cant have a high consumption tax or you will encourage cross border shopping. by not having sales tax you will on the other hand encourage cross border shopping by tourists, thereby replacing lost revenue by increased economic activity and greater employment. also with a higher income tax you will have built in a more natural and free market friendly tax curve. consumption taxes stifle economic activity no matter what you do.
Hi Brad,
Thanks for commenting, I appreciate your input. A couple of points though:
Making deficits illegal and “enforceable” by law is a bit of a non-starter. Perhaps someone who has worked for the Chief Justice (*cough* Richard *cough*) could confirm/refute this, but I think this would fall under the issue of the supremacy of parliament (though I think I have that term wrong). Basically, what it means is that if legislation is passed that conflicts with previous legislation, then the most current legislation takes precedent. I think this would count for budgets and legacy legislation criminalizing budget deficits.
Further, it’s not always wise to run a surplus. Nick Rowe explains it best here. Essentially, endless government surpluses will lead to more and more government ownership of the economy.
As well, if there is inflation, that will eliminate some or all of the debt.
Nonetheless, what I take as your main point is important. Governments are spending too much money, and they need to get it under control, pronto.