Wednesday, October 31, 2007

A GST Alternative

Credit to Andrew Coyne for inspiring this idea with his stand in favour of carbon taxes.

Now that Canada is headed toward a 5 per cent GST, is there any turning back? What political player would be able to pass a straight-up GST increase and survive? What circumstance would allow that rabbit to pull out of the hat? Here's a hypothetical that should probably never be played out, but highlights an unusual but perhaps useful direction.

Stephane Dion and the Globe’s 20 surveyed prominent economists have panned the move. The sense is simple: in a hot economy, we don't need to directly stimulate spending with a sales tax cut. Income tax reductions clearly give people more flexibility with their money.

Ignoring the income that it generates for the government, the GST is a useful policy tool for tempering the Canadian economy. Boot it down if you see a recession coming on, kick it up to encourage people to save. In tandem with incentives, it could allow effective market adjustment.

Personal taxes, on the other hand, do not seem as useful. If anything, jumps between brackets encourage people on the margins to turn down higher paying job offers for fear of simply paying more to the government. In a knowledge economy, this is deadly.

Considering the GST is much more useful, why don’t we shift the balance: lets jack up the GST and dump all those savings into deep income tax slashes.

I’m talking significant cuts. Each GST point is worth about $5.5 billion to government coffers. Considering the government took in $134 billion in personal and corporate income taxes in 2005/6, a boost to a10% GST from five would afford a 21 per cent tax reduction across the board, without any distribution to favour lower tax brackets in the reduction.

Imagine keeping one more dollar for every five you pay out. The GST on that $5 would only be 50 cents. Consider the extra burden shifted onto prices for big-ticket items.

Plus, a 10 per cent tax would have more room for effective adjustment. If you reduce the current tax by say, 3 points, to eat up the budget surplus, you are reducing it by 50 per cent (more once the 5 per cent reduction kicks in). Even varying it by fractions of points on an ongoing basis (similar to adjusting the Bank of Canada overnight rate) would allow the government to help fine tune the economy and ward off recessions.

It would, as well, be a nearly irresistible incentive to save and invest, for both business and individuals. Canada is sorely lacking right now on both fronts.

Certain sectors, including the auto and housing industries, could well suffer under the higher GST as people may, at least temporarily, cut back on big spending. The law of diminishing returns suggests that the 10th tax point would not bring in as much as the 5th or 6th. However, we are on strong fiscal footing without the increase, and well placed to further cut income taxes or offer relief for specific industries.


tzink said...

> lets jack up the GST and dump
> all those savings into deep
> income tax slashes.

While I agree with you that taxes on income are preferable targets for reduction rather than sales taxes, why not have the gov't spend less money and cut taxes all around?

It's the taxpayers money, after all.

Saskboy said...

Tzink, because if we put a tax on big ticket items, we discourage consumerism which will discourage waste. It's the same sort of idea the Green Party has in a carbon tax, with an income tax slash.