Tuesday, November 06, 2007

If you are going to cut taxes, Stephen Harper has picked the right one - the hated GST

Bill Tieleman’s 24 Hours Column
Tuesday November 6, 2007


Think before you criticize GST cut

By BILL TIELEMAN

Even a stopped clock is right twice a day.

- Marie Von Ebner-Eschenbach

The federal Conservative government is cutting the goods and services tax by another one per cent.

That means Prime Minister Stephen Harper is actually doing the right thing, something groups usually opposed to Conservative policies actually support, like the Canadian Centre for Policy Alternatives and the National Anti-Poverty Organization.

And it means Harper is rejecting the advice of economic conservatives, like the right-wing Fraser Institute, the Bank of Montreal, the Vancouver Board of Trade, and the C.D. Howe Institute.

But wait! The Canadian Auto Workers also opposes the GST cut. So do the federal New Democratic Party and Liberal Party.

And the CCPA and NAPO have changed their minds since first calling for a GST cut a few years back - now they oppose it!

What's a sensible person to think?

Well, if you are determined to cut taxes, whacking the hated GST is the right thing to do.

The GST is regressive, while income tax is progressive.

To illustrate. Say one person makes $20,000 while another makes $300,000. The first buys a car for $20,000 and at five per cent GST pays $1,000 tax.

The richer fellow buys a $60,000 car and pays $3,000 GST.

The $1,000 GST the lower income person has paid equals five per cent of his income while the richer one has paid $3,000 - but just one per cent of his income in GST.

It's obvious the GST hurts one a lot more than the other.

That's not to say the Conservatives are doing their best to help the poor - far from it. Increasing the GST tax credit, building social housing or creating child-care spaces would all be more effective - but less politically appealing to the Tories.

But opponents to the GST cut should think carefully before criticizing it.

The CCPA, for example, said in a 1999 paper: "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."

But last year, the CCPA issued another paper claiming: "This is a tax cut which disproportionately favours high-income families. For every dollar of this tax cut received by low-income families, over three dollars goes to families that are not low-income." Whoops - which is it?

And federal Liberal Leader Stephane Dion says if elected he would consider reinstating the two per cent GST cut. Ouch.

Meanwhile Liberal finance critic John McCallum voiced support for other parts of the Conservative fiscal update: "We certainly like the significant corporate tax cuts." Ouch again.

So enjoy the GST tax cut - go buy something and create some jobs - but don't let the Conservatives off the hook when people are still begging in the streets.

27 comments:

G West said...

Bill, Bill, Bill. You're not really serious about this praise of a GST cut are you? It may be politically a smart move but it's not going to do a thing for people who actually NEED help. While consumption taxes like the GST are regressive the fact that Pee Wee has reduced the GST by 1 point won't buy the family at the bottom end of the income distribution much more than dinner out at a cheap restaurant (McDonald's) once a month.

As Bruce Clark of the CCPA points out

Taking all of the income tax changes announced in the pre-Halloween mini-budget, it is easy to conclude that Canadians have been handed a trick in the guise of a treat.

For all the bluster, a single parent will save up to $298 this year, $184 in 2008, and $94 in 2009. And that is the maximum possible gain.

These gains will be lower for anyone making less than $38,000 a year - and considering that's the average wage in Canada, we're talking about a lot of working families who have very little to gain from $60 billion in tax cuts.
By 2009, a single individual will get back 39 cents a day and a single parent will get back a measly 25 cents a day from these tax cut announcements.

Chris said...

2 quick points (stolen from other smarter people) about the GST cut:
1) it makes the tax less effective because the cost to administer is the same, but the amount collected is less.
2) the GST is a consumption tax so it hurts those who consume the most. This is good for the environment. A carbon tax would be even better.

Anonymous said...

I was very opposed to the GST at the time of its introduction - it is indeed a regressive tax, as Mr. Tieleman correctly points out.

However, I since have changed my perspective about consumption-based taxes. We now have a huge criminal/underground economy in Canada whose members do not pay any income taxes. If we remove all consumption taxes, these people will get away without paying any taxes, with the exception of taxes on such items as liquor, tobacco, and gasoline on which excise and other taxes are levied prior to reaching the retail level.

The thought of these criminal parasites making huge ill-gotten gains while paying virtually no taxes (if consumption taxes were entirely eliminated) makes my blood boil.

Maybe we should retain some retail-level taxes so that these crooks do at least pay some taxes.

What do you think?

Anonymous said...

Cutting the GST without replacing that revenue from other sources is not what the earlier CCPA piece by Dobbin (that you link to) recommends. In fact, he goes into detail about what other sort of taxes we must shift to if we cut the GST - perhaps a Euro-style VAT or enviro-friendly tax.

The problem is your phrase "if you're determined to cut taxes...". Yes, the Tories are determined to do this, so I suppose we can be thankful for a GST cut rather than another kind of cut. However, supporting the GST cut without replacing the revenue just reproduces the broader ideology that tax cuts are good, period. ("Give us back 'our' money!") That sort of thinking undercuts any possibility of emphasizing public welfare rather than "every man for himself."

Budd Campbell said...

The cut in the GST to 5% will have to be taken into account by BC Finance Min Carol Taylor. Whatever the merits of consumption versus income taxes, and I think that entire line of analysis is highly debatable and has become another intellectual flavour du jour for the various fakey "greens", the politics of the situation are that it would be quite untenable for the BC Liberals to be taking 7% at the till when the Feds are only taking 5%.

Ian King said...

Congrats, Bill, on supporting an economically inefficient and regressive policy -- and a Conservative one at that! Trouble is that your arguments don't add up.

You're suggesting that someone earning $20,000 could ever afford to buy a $20,000 car. Yeah, right. More like $4000 (the same percentage of income as your $300,000 earner). In other words, a used car that's not subject to GST Most of the $20,000 earner's income gets eaten up by things that aren't subject to GST -- income tax, EI and CPP premiums ($3000 or so for all three), rent ($6000), and groceries ($2000). That's for a single person. That leaves $9000 to spend. Even if every last cent was spent on GSTable things, our low-income friend would save $90. Wow. Compare that to the $156 he or she will save with the income tax cuts. Repeat for anyone in the bottom tax bracket. The GST cut is better for the middle and upper-middle class who spend more of their income on things subject to GST. That's what the CCPA's 2006 study was driving at.

Want to help the less well-off? You could double the GST credit ($3.5-billion) for less than it would cost the treasury to cut the GST by 1 ppt. That's another $240 a year in even the most dirt-poor Canadian's pocket -- more than they even *pay* in GST -- and yet it would not transfer a penny to the better-off. Far better than cheap gesture politics.

Smilin' Jack, ever the enemy of working Canadians, couldn't even bother with a kind word for increasing the basic exemption. Never mind that it's worth $104 a year for almost anyone with an income. Couldn't support lowering the bottom tax rate -- and he brought the Liberals down over those two cuts in 2005. Couldn't even back lowering small business tax; the odious little man was reduced to babbling about Big Oil and ATMs.

The Conservatives are right twice a day -- but it's on Afghanistan and terrorism, not taxes.

Anonymous said...

Yes. Well the Libs are really no different from the conservatives anyway Ian so it really doesn't matter when Paul Martin decided to lose that confidence vote does it?

And don't get your hopes up. Both parties are led by odious 'little' men - Harper just happens to be a 'little' more rotund and in control of his caucus; Dion knows he can't dump the Tories because he's afraid of an election.

You're right about the futility of cutting the GST by a point though - and Bill's wrong - as I see it.

Anonymous said...

"...he goes into detail about what other sort of taxes we must shift to if we cut the GST - perhaps a Euro-style VAT or enviro-friendly tax."

The GST and VAT are the same thing!

Bill Tieleman said...

Thanks for the comments on my column, as always - negative or positive they are all welcome.

But I think several posters have wilfully misread my column.

I said clearly "IF" you are going to cut a tax, the GST is the one.

And I said clearly that: "Increasing the GST tax credit, building social housing or creating child-care spaces would all be more effective" than a GST tax cut if you wanted to help lower income Canadians.

But some of you let envy of the rich - or at least the better off - get the better of you.

Ian King - the GST is "regressive" period. I didn't invent the term, look it up.

And arguing for income tax cuts being more efficient - it depends on who get them, of course.

The point of the example isn't whether or not someone can buy a $20,000 car, it's that there is an obvious discrepancy in the effect the GST has on a lower versus higher income earner.

On the consumption argument - for goodness sake - lower income earners are not the problem and they spend nearly all they have on necessities. If you really want to curb consumption - and you should be more specific which consumption, because I suspect you don't mind people buying a high priced Prius but oppose the turbocharged Mercedes - then look at taxing the living bejesus out of rich people through income taxes, surtaxes, luxury car taxes,etc.

They will move out of the country at some point and consume in the US or Ireland but you can far better reduce conspicuous consumption with more targeted measures than the GST.

As for my friends at the CCPA, the words speak for themselves. We are all entitled to change our minds but their original point still holds - the GST is disproportionately a burden on lower income Canadians, including those who don't pay taxes.

Now bring on Round 2!

Budd Campbell said...

Bill, I think this thread has demonstrated two things. First and least, Ian King, like Terry Glavin, is a Liberal Party of Canada apologist and propagandist. This isn't news, but it's very clearly on display here.

Second, the left in Canada suffers from a number of pathologies beyond its reflexive anti-Americanism, one of which is a highly exaggerated distaste for Conservatives as against Liberals, which in turn is really a function of patronage considerations, not philosophies. The result is that intellectuals on the left, such as the CCPA, are hobbled and diminished in their effectiveness. The CCPA's contradictory stances on the GST is probably one of their least important failings, though it is so clear and conspicuous that is does act as a signal of a larger problem.

kootcoot said...

As Bill's original post and the following comments display - taxation is a complex issue. I resent the regressive nature of the GST, though agree with the commenter who pointed out how it at least captures part of the immense criminal economy.

Regarding Ian King and his breakdown of the 20,000 a year wage earner. I would like to talk to that individual and find out how he keeps his rent and grocery bill so low. He obviously lives nowhere near Vancouver, or in a hovel. Or perhaps he spends the nice weather part of the year on the street.

If we are going to have the dreaded GST, at least 5% is a much easier for everyone to calculate, all along the line and Carole, if BC went to 5% also, then 10% is super simple for us all. My other beef with sales taxes, other than their existence is some of the lost exemptions, particularly the ones pioneered by the GST. I still haven't accepted the moral propriety of taxing pain (medicine, especially pain killers and anti-inflamatories) or books and magazines. I don't tnink taxes should be applied to necessities (unless you feel freedom from pain is a luxury) or effect freedom of speech/information.

Lord Kitchener's Own said...

I love your crazy car analogy!

You have a poor person buying a car worth 100% of their annual salary, and a rich person buying a car that's worth 20% of their annual salary and you're shocked that relative to salary the poor person pays 5 times the tax?. 100 divided by 20 is 5 after all, no matter what level the GST is at! OF COURSE the poor person's GST hit is 5 times that of the rich person's (relative to salary) your analogy is DESIGNED to give that number.

If the rich guy buys a $600,000 car, then his GST hit is 10% of his salary, while your poor person only took a 5% salary hit on his $20,000 car. Suddenly, relative to salary, the rich guy's paying twice as much!!! So, does my jerry-rigged example trump your jerry-rigged example???

The reason the poor person's GST hit relative to salary is 5 times that of the rich person is that the car you have them buying (relative to salary) is five times as expensive!!! So yes, if person A spends 100% of their salary on a car, and person B spends 20% of their salary on their car, then person B will spend 5 times as much in tax, relative to salary because they're SPENDING five times as much, relative to their salary.

Duh.

G West said...

excellent point Budd - the fact that Liberals and Conservatives call themselves by different names is little more than protective colouration...this is a distinction, not a difference. A simple argument about who happens to have the conch and the coveted POWER that goes with it this year. With both those breeds it is always about having power – now that pee wee appears to have the upper hand for a moment it’s clear that the Liberals will have to learn to suck it up for a while and that’s not a comfortable position for them.

Removing the GST from a larger basket of staple goods and necessities and increasing it on luxury items, travel, high end hotel and restaurant foods ought to be the priority of progressive schemes. Equity in income taxation can only be the result of progressive rates that apply to ALL income - not just the kind working folks get in their pay packet every two weeks. Anything else - unless balanced to achieve a similar result is regressive. Bill's argument isn't wrong - he just didn't apply it consistently.

In my view. By the way, nice pick up on the Ian King thing - his nominal and foolish attack on Jack Layton is about as facile as his mentor Terry's lame assertion that he's a 'leftist'.

Budd Campbell said...

Not that I am trying to take over this discussion or anything like that, but I thought I should add that in the Sept 14th First Quarter Review, BC Finance projected the 2007/08 year end social services tax revenues to be $4.7 billion out of total revenues of $38.5 billion. If one takes away two sevenths of that, some $1.35 billion, the impact on total revenues is just -3.5%.

Can Finance Minister Taylor really look the average Canadian in the eye and say, "Forget about it, we can't even afford to think about that!"

Anonymous said...

Round 2...

Are the VAT and GST the same? Of course they're both consumption taxes. Dobbin argues the VAT is different because it taxes luxury goods more than everyday goods.

Bill didn't answer my point that supporting a GST tax cut without calling for an immediate and more-than-equivalent income tax INCREASE (especially on the higher marginal rates) buys into the whole neo-liberal ideology that both Conservatives and Liberals uphold. ("Taxes: bad. Governments: bad - or at least, should get out of the way of the market.")

We need to keep hammering what the CCPA is hammering: taxes are the price we pay for a decent quality of life. Celebrating a GST cut doesn't emphasize that at all.

Budd Campbell said...

"By the way, nice pick up on the Ian King thing - his nominal and foolish attack on Jack Layton is about as facile as his mentor Terry's lame assertion that he's a 'leftist'."


Hi G West, ... I don't remember when I first noticed this particular Batman/Robin-style Grit Duo Act, but once you've see it, it's pretty damned hard to ignore.

Harris said...

A regressive tax is one in which the average tax rate falls as income rises. The GST is a flat tax on consumption but it does not start at the first dollar of consumption, because of the GST rebate. With the rebate, the average consumption tax rate rises with income and consumption. This is a progressive tax. Our income tax system is also progressive because we have a rising marginal tax rate with income and we have a tax-free amount, the personal exemption. These two features produce a rising average tax rate with income.

Anonymous said...

harris,
That's factually true but practically of little conseqence since the actual quarterly payout to low income earners is so poorly tied to the tax expenditure. Added to that is the fact that married couples can only apply for one GST rebate which further skews the progressivity of the tax to the point that it is, for all practical purposes, regressive. Added to this is the fact that many persons who pay the tax (children and younger persons not in the work force) pay the tax but get no refund.

Ian King said...

Round Two!

Bill, the GST is not regressive across most incomes. You didn't invent the term, but you're using it as dishonestly as you did the word "gerrymander".

Basic groceries and rent are exempt from the GST; the effect is that the poor pay proportionately less in GST than the middle and upper-middle classes. The poor don't have as much money by any measure to spend on taxable goods!

Feel free to show how the GST cut benefits poor and working-class Canadians more than increasing the basic exemption and cutting the lowest income tax rate. I showed that they're better off.

Cutting the GST is great if you're in the market for a new house or new car. Not so much if half or more of your take-home goes to rent and food.

Kootcoot, I know more than I'd like to about living cheaply in Vancouver. I made the assumption that a low-income earner will live cheaply, in low-end (likely shared) digs and eating a varied selection of rice and pasta. But let's bump up their rent and food by a few thousand a year and play your game. Presto! Their potential savings falls to $60, compared to $156 for the income tax break. Thanks for reinforcing my point.

Budd, do you recall grumbling about how the NDP having turned away from blue-collar workers in favour of public (and pseudo-public) sector professionals and paraprofessionals? Take that culture shift, repeat a dozen times in a dozen ways, and there's my beef with the federal NDP leadership -- Layton and his fellow Annex-dwellers have little connection to rank-and-file workers (who, I might add, pay their salaries!) Sound familiar?

Budd Campbell said...

"... Layton and his fellow Annex-dwellers have little connection to rank-and-file workers (who, I might add, pay their salaries!) Sound familiar?"

Ian, as soon as you repeat the Warren Kinsella rant about Jack living in subsidized housing it will have an extremely familiar Liberal ring indeed.

Anonymous said...

The GST IS REGRESSIVE.

Two taxpayers buy exactly the same package of taxable necessity goods in a year: a stove, clothes, shoes, an overcoat, paper products, building materials, hotels etc, etc. Total bills come to $8,000.00 for each and each one pays GST on their purchases equal to $560.00

Purchaser A has an income of $30,000; purchaser B makes $60,000. a year.

The GST paid by A is 1.87 % of his/her yearly income while Purchaser B has been taxed (for exactly the same goods) only 0.93% of her income.

Therefore, by definition, the GST is a regressive tax...unlike the income tax where the percentage of tax applicable rises with income level.

Exactly the same inequity exists in payroll taxes and CPP deductions, which reach maximum contributions at relatively low levels of income. The percentage of total income taken yearly from higher income earners becomes less and less as gross income rises. Only the income tax addresses this situation at all. Furthermore, it would be unfair not to mention that the Martin Liberals had reduced the tax payable on the bottom income bracket (below $35,000) from 16 – 15 percent – a move which Flaherty reversed in his first budget. This guy isn’t doing low income earners any favours – especially when compared to the benefits at the other end of the spectrum….

Ian King said...

Budd, Budd, Budd...

I've never gone near that attack on Layton, and never will. My shadowy masters at Liberal HQ advise me that anyone who resorts to that old line looks like an ignorant ass.

I find it interesting that you've offered no opinion on the economic merits of the GST cut -- only the political ones. You're an economist by trade. What's your take on its economic effects?

Bill Tieleman said...

Ian King - just because you didn't understand the term "gerrymander" and equally fail to understand the difference between a regressive and progressive tax is no reason to be chippy!

Just because you don't agree with me or my definition does not mean I am "dishonest" any more than for me to conclude from your postings that you are "stupid".

Once again, you are setting up the straw man.

I did not say a GST cut was better than increasing the basic exemption - and in fact I argued that there are far better ways to help lower income earners and named some, including social housing.

Some posters are also making the rash assumption that all lower income earners get their GST rebate from the government - many are not registered and never see that cheque.

In fact, as Stats Can recently reported: "Although credits are designed to soften the burden of GST for families with lower incomes, only 26% of the total credit went to low-income families."

http://www.statcan.ca/english/freepub/75-001-XIE/10606/art-2.htm

That is not to say the GST credit shouldn't be increased - it should, as I also argued - but that presuming everyone files a tax return, gets a credit etc, isn't necessarily the case.

One of the Anonymous posters said I hadn't answered the question of why not call for an income tax INCREASE to match the GST cut revenue loss.

It's a fair argument to make - soak the rich - but given the huge surplus, a hard one to win on.

Budd Campbell said...

"I've never gone near that attack on Layton, and never will. My shadowy masters at Liberal HQ advise me that anyone who resorts to that old line looks like an ignorant ass."

If those are your orders, you're not getting them from Kinsella's crowd.

What do I think of the economic merits of cutting the GST? I think they're fairly good, actually, because I think that transactions taxes such as the GST and PST are regressive even with exemptions and rebates, and what is more, they discourage the act of production itself. Income taxes are only raised on the difference between revenue and expenditure, whereas these taxes raise basic costs. Businesses can deduct the GST on material inputs, that's true, but individual workers cannot unless legally self-employed. There's also the grey market incentives to consider, and the GST and PST may do more to drive activity underground that does income tax.

Bill Tieleman said...

For all posters - we can argue the details, the merits and the downside of the GST cut all we want but here is the first poll on what Canadians think - 76% approve.

This story is on CTV:

Poll suggests Canadians like Tory mini-budget

Thu. Nov. 8 2007 12:18 PM ET

The Canadian Press

Ottawa -- A new poll suggests the vast majority of Canadians like the Conservative government's mini-budget - especially the income-tax cuts.

But it's not clear if that will translate into more votes for the Tories.

The Canadian Press Harris-Decima poll -- conducted in the three days after the Halloween economic update -- found that 83 per cent of Canadians surveyed said they supported the income tax cuts.

Seventy-six per cent approved of reducing the GST by one percentage point.

The impact on Conservative fortunes was significant, but not massive, according to the numbers.

One in four Canadians said the tax cuts would make them more likely to vote Conservative, while 14 per cent said it would have the opposite effect.

http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/20071108/tax_poll_071108/20071108?hub=Politics

G West said...

Bill,

That's hardly a surprise. How many stories in the MSM and on Radio and TV have actually taken a moment to analyze the cut and its rather mild implications for ordinary taxpayers?

I think I saw one article in the Toronto Star...virtually every other commentator, including you, took the easy way out.

Is that fair?

Why would expect the public to react otherwise? The media have been doing nothing but push the Harper program since the release of the economic statement anyway. For all the independent thinking I’ve seen on this file, one might just as well have gone to Environment Canada’s website and read the latest piece of propaganda.

If political analysis and economic commentary amounts to nothing more than watching the polls, this country really is in serious trouble.

Anonymous said...

Bill started off mentioning just who disliked the GST when it first came into play,so I won't bother reminding the folks again. But to the average taxpayer, any kind of a tax deduction even the GST which some folks here believe is a good tax, is better than nothing. The dirty part of the GST is that it keeps hitting folks as cars and other stuff gets resold and each time a government has their hands out. The undergound econormy hurts us all, as the word tax never is involved. I think some posters got their shirts in a knot about the tax simply because the Cons have dropped it twice, just like they said they would. If they ever got enough support to form a majority, well guess what? The GST might have to go up to pay off the debt. AS a pensioner I accept any cut of taxed heading my way. Personally I wouldn't vote for those guys if they dropped the GST, and got rid of some of their most rabid fans. DL