Why Cutting The GST Was Great Politics and Terrible Economics

As some of you may have picked up on I tend to have a slightly right of center bias on economic issues (not social ones I should quickly point out).  I tend to believe in many of the bedrock foundations of fiscal conservatism such as a balanced budget, the responsibility of the individual, and small governments.  In the days to come I have several articles going up across various sites detailing what I think about the Canadian budget that was released this past week.  I’m not going to lie, I really like the direction that this budget takes in terms of a long-term look for Canada; however, in showing that I am not merely a Conservative Party mouthpiece, I thought I’d post a little criticism of the boys in blue (not the cops) today.

Two Sides Of The Same Coin – But Not A Penny

There are actually two different issues to comment on when you look at the fact the Conservatives fulfilled their campaign promise in 2006 to cut the GST by two percentage points.  The immediate reaction is to ask what the hell the Tories were doing cutting revenues even after they realized the financial world was going to melt down.  The second aspect of the conversation, is more of  a big picture look at consumption (or value-added) taxes in general, and why I think they are actually a really good form of taxation (if there is such a thing!).

Friends, Romans, Lend (*give*) Me Your Income

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Ultimately, the decision to cut the GST was obviously nothing more than a political maneuver designed to curry favour with ill-educated voters.  If you want to cut taxes in order to spur growth, there are so many better ways of doing this (although the lower corporate tax rate was a good start).  The GST cut was the classic populist political play in terms of throwing out a juicy piece of policy that is easy to understand and highly visible.  That stupid percentage shows up on every purchase you make (other than essentials) and is always on top of peoples’ minds.  The only thing more visible is probably the price of gas, but that’s another issue.  The decision to cut the GST has cost roughly $11-11.5 billion every year since it was lowered to 5% according to the Globe and Mail.  Forgetting for a second how much this loss of revenues has already added to our overall debt through increased deficits (and then subsequent debt servicing costs), if we reinstated the old 7% rate today, and did nothing else aside from what this current budget promises, our books would balance in two years!  That is pretty insane for a developed world country, it is even far ahead of the paragon of financial conservatism – Germany; however, as bad a policy as it is, I’m certain the Conservative posse must consider it a victory.  It gained them enough votes to get their majority after all, but in his economist’s heart, Mr. Harper must realize how ridiculous a move it was, and even worse, he must have known it at the time.


One interesting part that came out of the whole political sideshow that has been the Republican primary campaign is the whole “9-9-9” rant by Herman Cain.  For those not familiar with the proposal, Cain (or almost assuredly, someone on Cain’s payroll) ran the numbers on an entirely new tax policy that revolved around a 9% personal tax rate, 9% income tax rate (for every dollar earned), 9% consumption tax rate (GST).  Fareed Zakaria over on TIME and CNN came up with a much more palatable version of the same plan that really left me thinking (quick tangent: if you haven’t read Mr. Zakaria before, the guy is pretty smart and original).  There is currently no value-added tax in the USA that resembles Canada’s GST, so debate on the issue is very interesting to me.

Good Taxes?  Oxymoron Anyone?

I honestly believe that consumption taxes or value-added taxes are a great idea, and most economists agree with me.  The first reason they are great is that they don’t tax things that are positive for individuals and positive for the country.  Earning money and investing money are great things for society as a whole.  Pursuit of those things has huge net positives, why would we want to provide these disincentives to earn money or invest in the form of income taxes and taxes on investment gains?  It makes little sense, and we should work to minimize those as much as possible.  Value-added taxes are much different.  Spending on consumer goods is something we can all control (or should be able to be anyway) and something that is not really beneficial to society (or probably the individual according to most how-to-be-happy books).  If you put a tax on it, and lessen taxes on income, and investment gains, then you are encouraging people not to spend frivolously, to save as much as possible, and invest it without fear of having all their gains taken.  That is a great thing no matter how you slice it!  Our developed world pals across the pound have realized this and Germany has a 19% value-added tax, and the U.K. tops that with a round 20%, Denmark checks in at an astounding 25%!  Heck the EU minimum is 15%!

Deficit?  What Deficit?

Just to reiterate how crazy it was to chop 2% off – the USA is the only developed country that does not have a GST equivalent!  If we had left the GST alone, and actually raised it by 2% in the budget (bringing it to a still modest 9% relative to other G8 countries).  We would basically have a balanced budget right now!  Can you imagine what we could do with a 15% (the EU minimum) GST rate?  According to the Globe and Mail numbers, a 10% increase to our current GST rate would give us about $57 billion in extra revenues (maybe this is overstating things a little, as the higher rate might mean less spending, but it’s my article so I can exaggerate if I want to damn it!).  Not only would this wipe out our deficit, it could single-handedly pay off our entire debt in 7-8 years.  When you crunch the numbers like that, it makes you realize how much wealth their actually is in Canada, and how hard we really try to screw it all up.

The cherry-on-top part of consumption taxes is that they are very hard to cheat on, or find loopholes in.  You can’t pay a fancy accountant to get you out of them!  You simply walk up to the till and hand over your plastic (does anyone use cash except for Gail Vaz-Oxlade anymore?).  This makes them much more efficient and easier to collect as well.  So let’s review.  The GST is relatively efficient, easy to administer, encourages positive saving habits, and could give us a huge advantage over the rest of the developed world – yah, we better cut that out entirely, it is way too logical for governments to compute.

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12 years ago

I agree that the move to lower GST was politically-motivated, but I disagree that there’s something inherently good about the tax. How is a tax on consumption not a tax on income? How is it not damaging? For example, if I’m a business selling goods and my prices go up 15% because of the tax, that’s going to impact my income. Either I’m going to earn less profit, meaning I have less income for re-investment, hiring employees, and research, eventually meaning my supply of goods will be lower than it otherwise would have been, or my overall cost will be… Read more »

12 years ago

Oh, to clarify, whether their overall spending increases or decreases depends on the case, but in all cases their welfare will be damaged from having to pay higher costs. Either way the producers will also get hit just the same as if their income had been taxed.

12 years ago
Reply to  Teacher Man

Well the thing is that if producers earn less income, there won’t be more saving & investing at least on their part, cause they’ll have less capital to produce goods with! However, taken in conjunction with the corporate tax maybe it does have the net effect of boosting savings & consumption. In that case, I agree with you that those are good things for the long run, but it’s not necessarily good from the standpoint of everyone and the libertarian stance would be to allow people to make that choice for themselves, based on valid market signals. Honestly it’s fine… Read more »

Same story goes for most of the Govt across the world. When elections are near they tend to think about winning by making stupid policies which don’t do any good to economy. There aim is just to tell unprivileged people that they are doing good to them and win there vote but reality is that benefits do not reach them at all

I think a lot of cuts are to woo ill-educated voters – both in Canada and down here in the States.

Great discussion you two. I was with Kevin initially but you bring up some good points Teacher Man. I guess this means we need the tax but not too much of it, as silly as that sounds. Like with anything else, we need to find the ideal balance.

Nick Curran
10 years ago

“According to the Globe and Mail numbers, a 10% increase to our current GST rate would give us about $57 billion in extra revenues (maybe this is overstating things a little, as the higher rate might mean less spending, but it’s my article so I can exaggerate if I want to damn it!). Not only would this wipe out our deficit, it could single-handedly pay off our entire debt in 7-8 years. When you crunch the numbers like that, it makes you realize how much wealth their actually is in Canada, and how hard we really try to screw it… Read more »

10 years ago
Reply to  Nick Curran

How much less can most families buy Nick? Are Canadians really going to dial back their consumer spending that much? All the evidence we have from the past 20 years says we like to spend money no matter what.

2 years ago

>>Heck the EU minimum is 15%!
No. For 2021, the minimum VAT rate is 17% (Luxembourg). Here you can see the current VAT rates for all countries

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