After reducing the Goods and Services Tax by a percentage point last year, Prime Minister Stephen Harper recently announced his resolution to drop the unpopular tax down to five per cent, effective the first day of 2008.
Harper’s decision is the latest evidence of the paradoxical policy shift between the two main Canadian parties on the GST issue. Harper’s Conservative Party, whose predecessors launched the GST during the Mulroney years, is now hastily dismantling this unpopular tax. Dion’s Liberals, who promised to rid Canadians of the GST during Chrétien’s first term, are currently defending it.
Tory Finance Minister Jim Flaherty said that the cut would encourage greater spending, which in turn would stimulate the economy and generate GST revenue via increased consumption. But what does this mean to the average taxpayer?
For starters, there will be considerable savings for homeowners: a family can save over $5,000 if they buy a new $300,000 home next January. A two per cent cut would save a shopper some $500 on the purchase of a new $25,000 vehicle. The more expensive the item, the more money one can save. Considering that the national economy is so heavily dependent on exports to the United States—and the rise of the Canadian dollar has suddenly made Canadian products less affordable—policy aimed at increasing consumption of local goods isn’t a bad idea, economically speaking. When the government cuts expenditures and taxpayers increase consumption, the result is typically neutral in the big picture.
Critics decry the loss of billions in tax dollars that could be used for social funding. The flip side is that regressive multi-level value-added taxes, like the GST, are a burden to low-income Canadians. Individuals in the lower economic strata tend to spend more of what they earn—thus paying more in sales tax as a proportion of their net income—than those at the top. The tax burden has become more and more regressive over the past two decades: the poor now shoulder a larger proportion of the tax load compared to the 1980s, and the main culprit of this change is the addition of the GST and a hike in other regressive tolls.
Economists project that Ottawa will have a surplus of $100 billion at its disposal over the next five years. However, only time will tell whether GST cuts and spending initiatives will keep the Canadian economy robust well into the 21st century