|Ten Tax Myths|
T he arguments against abolishing the GST simply don’t stand up to scrutiny — not even those advanced by some advocates of progressive taxation. They have suggested that the tax is now a permanent feature of the tax system and that it provides such a large piece of the revenue pie that it should be left alone. Its extremely regressive features, they say, can be moderated by other policies, such as the existing GST rebate to low-income earners.
It is also argued by some of those initially critical of the GST that, unlike some other taxes, it is a difficult tax to evade. And, while the GST is unquestionably regressive, the $18 billion a year that it raises helps pay for social programs, which are Canada’s most effective redistributive mechanisms.
Nevertheless, there are very good reasons to call for the gradual elimination of the GST. First, no one disputes that it is among the most regressive of all taxes,one that puts a disproportionate financial burden on those least able to pay. It is largely because of the GST and other consumption taxes that Canada now has an almost flat tax system when all taxes are taken into account.
Because poor and low-income Canadians spend virtually all of their earnings, they pay the GST on their total disposable income. Middle- and upper-income Canadians escape the tax on that portion of their income they are able to save or invest. The more you earn, the less onerous the GST.
A Carleton University study found that, for those earning less than $10,000, the GST and other consumption taxes took 14.6% of their income. In sharp contrast, those earning $100,000 to $150,000 had only 7% of their incomes eaten up by these taxes. The notion that we can moderate the impact of this tax on the poor implies that we will always have governments in place with the political will to implement such policies. The current GST rebate falls far short of cushioning the harsh impact on the poor, and the rebates have been getting smaller each year, due to inflation. (The rebates are indexed to inflation only if inflation reaches 3%, so that the value of the rebate decreases every year by the amount of inflation below 3%.)
The GST is just one of many measures that, in their effect, transfer wealth from the bottom 80% of the population to the top 20%. By implementing a tax that falls most heavily on those who have to spend all or most of their income to support their families, the government has been able to reduce the tax burden on wealthy Canadians.
As detailed elsewhere in this report, the wealthy in Canada are becoming ever-wealthier, and at an unprecedented rate. The decrease in the high marginal tax rates on the rich has been largely financed by the GST. The GST benefits the wealthy, not just because it is a regressive tax, but also because it transfers billions of dollars in taxes from corporations (replacing the old Manufacturers’ Sales Tax) to individuals. Improving the bottom line of corporations benefits the wealthy, the primary beneficiaries of corporate profitability.
There is another reason for targeting the GST for eventual elimination. Of all the taxes that could be cut or eliminated, the GST would have the largest impact on job creation. It is the only tax cut that comes close to the job-creation impact of increased government spending. As indicated above, a cut in the GST of $100 million would result in an increase of 53,000 jobs over three years — more than twice as many as would a corporate tax cut.
There is no question that the government would have to find a major new source of taxation to replace the $18 billion that the GST currently raises. And there are no simple, one-stop solutions to replacing the GST revenue. Numerous tax reforms need to be implemented — wealth taxes, a minimum corporate tax, additional high rates on very high incomes, and the elimination of questionable tax breaks.
The proposal for a domestic financial transactions tax has attracted some attention from proponents of progressive tax reform. The idea of taxing financial transactions comes from Nobel prize-winning economist James Tobin, whose “Tobin tax” proposal is aimed at currency speculation world-wide. Taxing the $1.5 - 2 trillion traded every day would raise billions for Third World debt relief and would cool the hot money markets that triggered the Asian financial crisis of 1998.
A domestic version of the Tobin tax, however, is problematic. Such a tax is already being implemented in several countries, including some of the most open free market economies in the world, such as Hong Kong, Singapore and Britain. But the tax raises relatively small amounts of money when compared to the billions brought in by the GST — revenue in the range of $150-200 million annually. Although the potential tax base is huge — nearly $20 trillion when all financial transactions are considered — much of this would disappear if a tax were levied. Some would move to other jurisdictions, some would be disguised as non-taxable transactions, and others would no longer take place.
More importantly, nearly three-quarters of such transactions in Canada involve federal and provincial government bonds. The burden of the tax would end up being paid by Canadian citizens, since it would make Canadian bonds less competitive. According to the CCPA’s Alternative Budget analysis, such a tax would also destroy the market for 90-day Treasury Bills, a key source of revenue for the federal government. The government would be forced to buy longer-term bonds at higher interest rates.
The goal of eventually getting rid of this regressive tax is nonetheless still achievable, and in the short term it can be made less regressive. As the debt-to-GDP ratio continues to decline, federal finances will improve and less of our revenue will go to paying interest on the debt. That would allow for gradual elimination of the GST through a staged reduction of the 7% rate.
Reforming the tax system to bring in greater revenues from wealth taxes, minimum corporate taxes, and additional tax brackets for very high income earners — and even a moderate financial transactions tax — would accelerate this process.
Alternatively, the GST could be changed into a European-style value-added tax that would build in higher rates of tax on luxury items, while lowering it on necessities. Such a tax could be used to achieve environmental as well as redistributive objectives, e.g., giving tax breaks for products made from recycled materials and taxing toxic products or those putting other stresses on the environment, at higher rates. This would in effect mean a tax shift to green taxes; something environmentalists have been advocating for many years.
|Ten Tax Myths|