When was gst lowered

The fiscal impact would be substantial. The effect could be even greater if provinces were spurred to decrease their rates in tandem with the federal cut. But, here too, the cynics are wrong. Sales tax cuts do get passed onto consumers, and they do lead to a surge in consumer demand. To show this, I examined the experience around the most recent sales tax cut in Canadian history. In October , Saskatchewan reduced its provincial sales tax rate to five per cent from seven per cent.

To estimate the economic effects caused by the sales tax cut, we need to know how much prices and sales change after the reform, relative to what would have happened in Saskatchewan had the sales tax rate remain unchanged. Figure 1 illustrates this method — and shows the first key result on how the tax cut was passed through to consumer prices.

The solid blue line in the figure depicts the monthly average consumer price of taxable commodities in Saskatchewan for the period. The figure shows that prices fell in both Saskatchewan and control provinces in mid, presumably as a result of the federal GST cut implemented in July that year. But prices fell again in Saskatchewan in October with the PST cut, and remained consistently below the synthetic control for the rest of the decade. On average, Saskatchewan prices were 1. I therefore conclude that essentially all of the two-percentage-point PST cut was passed through to consumers in Saskatchewan.

Next, I examine how the PST cut affected consumer behaviour. Figure 2 depicts the logarithm of monthly per capita retail sales in Saskatchewan, again relative to the synthetic control average of other provinces. The retail series are volatile, but the two series follow each other closely up to March , when the PST cut was announced, and retail sales in Saskatchewan began to rise. On average, sales were 5. The estimated effect is large, and the estimation method I employ may not control adequately for other economic factors at play in Saskatchewan in the aftermath of the tax cut.

The provincial economy boomed in the post-reform period, and these broader economic changes likely began to exert an independent effect on sales soon after the tax cut. Indeed, the provincial government subsequently implemented other tax changes that likely affected consumer spending. On 24 April , the Minister of Finance announced that the federal government would proceed alone, without the provinces, in applying a multi-stage value-added tax on goods and services and that the tax would go into effect on 1 January Negotiations between Ottawa and the provinces on harmonization broke off and the federal government announced that the provinces did not realize there was an urgent need for action.

The provinces then resorted to constitutional arguments to oppose what they considered a federal power grab. The Government of Quebec, for example, immediately denounced the federal decision on the ground that it was unconstitutional. The province contended that the action constituted flagrant interference in a field of taxation traditionally reserved for the provinces. Alberta, Ontario and British Columbia took legal action against the federal government, alleging that it had exceeded its constitutional powers by operating in a taxation field reserved for the provinces and that Ottawa should pay compensation to entrepreneurs who would be collecting the GST on its behalf.

The provinces continued their vigorous opposition to the adoption of the GST and to the idea of harmonizing it with their respective PSTs. They continued to accuse the federal government of interference in the consumption taxation field, which they considered their exclusive jurisdiction.

The provincial governments also did not want to associate with the federal government on the GST, given the political price that would have to be paid at election time for introducing such an unpopular tax. However, a few months before the introduction of the GST, the provinces gradually seemed to abandon the arguments on which they had based their opposition. On 30 August , the Quebec and federal governments announced the signing of an agreement under which Ottawa would transfer to the province full responsibility for administration of the GST in Quebec, and the Government of Quebec would harmonize its provincial sales tax base with that of the federal tax.

The new QST was introduced in two stages, on 1 January for personal property, and on 1 July for services and real property. This would be the only agreement which the federal government would manage to reach before the GST was introduced on 1 January Support for the introduction of the GST was far from unanimous.

In early , the provinces appeared to be less reluctant to harmonize their respective sales taxes with the GST. Some implied they might be on the verge of reaching an agreement with Ottawa. In February , the Saskatchewan government said it would harmonize its sales tax with the GST starting in However, the NPD government elected in Saskatchewan in October made it known that it was abandoning the harmonization plan.

After believing that harmonization would become a reality, Ottawa suddenly saw the climate deteriorate toward late and, until the end of , there seemed to be little likelihood that the provincial and federal taxes would be harmonized.

On 20 June , the Finance Committee published its recommendations. The national VAT would thus have a federal component and a provincial component. The Committee believed at the time that the provinces would agree to harmonize their respective sales taxes with the proposed new national tax because of the benefits afforded by a national VAT, particularly: a simplified tax system; reduced administrative and compliance costs; less bureaucracy as a result of the elimination of one complete order of government; and various economic benefits.

In each case, the proposal was for one national sales tax, levied on the same base across the country, which would have been collected by the federal government.

Businesses would have seen their compliance costs substantially reduced, because they would no longer have had to deal with two tax authorities. To avoid putting too great a strain on provincial revenues, the federal government planned to introduce sales tax credits for production inputs gradually over a period of three years. To induce the provinces to harmonize their respective taxes with the GST, the federal government offered those that agreed to do so greater room to manoeuvre in the areas of personal and corporate income tax.

The provinces rejected all these federal proposals. For some provinces, the loss of revenue following harmonization would be too great. In addition, harmonization would mean a transfer of the corporate tax burden to consumers, an idea generally opposed by the provinces. From October until the end of , there was no public movement on harmonization.

Some believe that the election in Ontario in June of a Conservative government that had promised to harmonize the systems would be the catalyst for harmonizing sales taxes across Canada. However, in March , Ontario announced that the province had been unable to reach an agreement with the federal government. As a result, they would not have been entitled to assistance if they had agreed to harmonization under the letter of understanding of 23 April The western and Maritime provinces opposed the proposed compensation, deeming it unfair.

Except perhaps for Prince Edward Island, no other province appears likely to harmonize its sales tax with the GST in the near future. The provinces are opposed to harmonization for a variety of reasons. Immediately after discussions on the GST ended in April , the provinces denounced the federal decision as unconstitutional, maintaining that a tax on goods and services represented flagrant interference in a field of taxation traditionally reserved for the provinces.

It was generally conceded, however, that the federal government had unlimited taxing powers and that it could employ a method of taxation already used by the provinces. This decision notwithstanding, the provinces continue to oppose harmonization for five reasons. First, the provinces are reluctant to accept harmonization because this tax is politically very risky. It is obvious that, by going ahead with harmonization and broadening their tax bases, the provinces would incur part of the political cost associated with the GST.

Second, by agreeing to harmonize their respective sales taxes with the federal system, the provinces would exempt business production inputs. Harmonization would therefore mean transferring the corporate tax burden to the consumer.

This is still a major argument for a number of provinces. Third, the provinces have always feared giving up significant discretionary powers over fiscal policy in a harmonized system. Because they could no longer set the tax base or rate, they would lose any independence and flexibility with regard to their respective retail sales taxes.

In the agreement, however, the federal government granted the participating provinces increased powers in the fields of individual and corporate taxation. Fourth, the provinces are also opposed to harmonization for reasons of administrative complexity. And yet the agreement signed in October provides that the federal government, not the provinces, will be responsible for collecting the HST.

There is no doubt that a perfectly harmonized system would make tax collection easier and that compliance costs for businesses particularly small businesses would be reduced.

For some of them, however, a system that differed from region to region, like that of the HST, would lead to problems and increased compliance costs. Effective tax rates and bases varying from region to region would complicate the tax treatment of interprovincial transactions.

Under the last agreement signed, interprovincial transactions not confined to the harmonized provinces appear to be more complex because the tax basis and effective tax rates differ from one transaction to the next depending on the province concerned. In an interprovincial transaction toward a province that has adopted the GST, a business registered in a non-harmonized province is nevertheless required to collect the HST. Conversely, where a transaction occurs in a non-participating province, the business registered under the HST system does not have to collect the provincial share of the HST.

Lastly, the provinces have always claimed that adopting an HST would lead to lost revenue and budgetary problems. Even with a broader base, several provinces would face a decrease in revenue because of having to reimburse production input taxes. To counter this argument, the federal government is promising to compensate the provinces through its adjustment assistance program.

In addition, the federal government is granting increased authority in the fields of individual and corporate taxes to the provinces that have signed agreements. Taken together, these measures should help the provinces that have moved to harmonization to offset the shortfall in their revenues, at least temporarily. Attempts to harmonize the GST and provincial sales taxes have seen many ups and downs over the years.

To date, only Quebec and three Atlantic provinces have agreed to harmonize their provincial sales taxes, but their actions have not induced the other provinces to do the same. One might have believed that Prince Edward Island would be added to the list after the HST was introduced, but it remains the only non-participating province east of the Ottawa River, and it is unlikely that its eventual participation will help change the status quo in the other provinces.

Ontario, however, could play a key role in bringing about the harmonization of sales taxes across Canada, and even the inclusion of the sales tax in advertised prices. The federal government seems disinclined to change its position, and the Minister of Finance has admitted that negotiations with the non-participating provinces are at a standstill. Although the government is pleased with the agreements reached with three of the Atlantic provinces, those agreements put it in a delicate situation.

It will not find it easy to alter the current proposal to satisfy the other provinces without jeopardizing the administrative benefits of the harmonized system because, for reasons of administrative simplicity, the same rules must apply across Canada.

For example, it would be impossible to have one adjustment assistance formula and different tax bases in Eastern and Western Canada. Apart from that, it appears virtually impossible that a single-rate national sales tax will one day apply all across Canada.

At best, the federal government could hope for four regional sales taxes: one for British Columbia, Saskatchewan, Manitoba and Ontario; a second for Alberta and the Territories; a third for Quebec; and a fourth for the Atlantic provinces.

However, this situation would not do any more to facilitate the inclusion of the sales tax in advertised prices. For individuals and corporations, harmonization could also mean higher taxes. Nova Scotia and New Brunswick have already announced new corporate capital taxes. As noted above, the GST has been controversial and not unanimously accepted.

Although the government decided not to replace it in , it was not for failing to consider alternatives, but rather because those alternatives seemed to raise even more significant problems.

A brief overview of some of those options and related problems is provided below. To date, Japan is the only industrialized country that has opted for this type of VAT. A BTT is easy to administer: businesses calculate the amount of tax payable by multiplying their total sales by the tax rate, then subtracting their total purchases, also multiplied by the same rate. Because a BTT applies to all transactions and because businesses therefore do not have to distinguish between taxable transactions and zero-rated or exempt transactions, the tax paid or collected on each transaction does not have to be recorded for accounting purposes as is the case with the GST.

The result is greater administrative simplicity. In addition, businesses base their calculations on accounting information already available to them, which reduces their compliance costs. However, these benefits are reduced in a harmonization context, such as that in Canada, in which rates vary from one province or region to the next. In this situation, the destination province of intermediate goods must be traced in order to apply the appropriate rates.

In addition, certain goods and services could not be zero-rated or tax-exempt under a BTT. Consequently, to preserve the principle of business accounting and the essence of the BTT, the tax base would have to be expanded, a measure that has proven unpopular and which the government seems disinclined to take.

In short, assuming a very broad tax base and a uniform tax rate across the country, the BTT would be simpler to implement than the GST. A BTT could thus have been a viable alternative if the federal government had agreed to: apply it at the federal level only, i.

Another promising alternative that was proposed was a federal payroll tax FPT. As the difference between sales and the cost of inputs, i. In March , Jonathan Kesselman of the University of British Columbia proposed to the House of Commons Standing Committee on Finance that the GST be replaced by a payroll tax which the employer would deduct at source based on gross salary, commissions, bonuses, social benefits and pension fund contributions. Consequently, an FPT would not have the distorting effects such as impeding hiring and employment growth generally associated with payroll taxes such as employment insurance premiums.

Kesselman estimated that the FPT rate would have to be set at approximately 3. An FPT would afford numerous benefits.

The principle of its application would be very simple compared to that of the GST. The FPT would affect all workers and it would not be necessary to draw complex distinctions between transactions or taxable, tax-exempt or zero-rated goods and services.

The FPT would not apply to benefits paid under revenue transfer programs such as family allowances, employment insurance and so on. However, there are also disadvantages to the FPT. It would apply to the current generation of workers in a disproportionate manner relative to pensioners.

One solution to the problem would be to levy a temporary tax on pensions to even out the tax burden. In addition, a poorly designed FPT could also have an excessive impact on self-employed workers if it applied to income regardless of the amount of capital invested in the business to obtain a normal return.

To solve these problems, Kesselman a few months later proposed a new FPT which he called a direct consumption tax. Various reasons may be advanced to explain why the federal government did not opt for this solution, in particular the following two. First, large organizations representing businesses did not really understand the proposal or all its ramifications and accordingly did not support it. Second, Kesselman was the only person to advocate it and found himself somewhat isolated among tax experts, accountants and lawyers in favour of the GST.

All participants in the current tax debate would acknowledge that a pure Goods and Services Tax GST would be regressive-that is, it would involve a proportionately higher burden on lower income earners than higher income earners. A study carried out by the International Monetary Fund put it:. A straightforward single rate VAT [or GST] with no zero rates except for exports and few exemptions must mean that the VAT payment by low-income households will be a higher proportion of their incomes and expenditures than payments by higher-income households.

That is, the VAT will be regressive. For that reason the Government has designed a compensation package to offset the regressive impact of the GST. The purpose of this paper is to examine the burden likely to be imposed by the indirect tax package, in particular the proposed GST offset by the various indirect tax measures proposed in the Government's tax package. The compensation package itself is not examined here, nor are the changes to direct taxes that will affect the distribution of income.

Compensation arrangements are set out in the documentation the Government took to the election. We start by looking at some general aspects of the impact of the GST on income distribution. A major effect of the GST on income distribution will come from the fact that, on average, low income earners spend more than they earn while high income earners spend less than they earn. The only data on income and expenditures for different income groups comes from the household expenditure survey HES undertaken by the Australian Bureau of Statistics ABS.

This particular data source is said to have problems. The Department of the Treasury warns that we should not make direct comparisons between income and consumption using these data. Those data problems are examined below. The approach here is to do the exercise with the household expenditure data and then consider how useful the exercise is in light of the problems with the data.

It is also worth reflecting on the fact that while the HES has been said to have problems for many years, no-one has come up with anything better. With these qualifications in mind the distributional issues can be addressed. As a first approach to this question, the estimated price effects due to the indirect tax package are added to total goods and services expenditures to determine the impact on different income groups.

Table 1 presents the results of that exercise using the Government's figure for the price impact on final consumption expenditures of 2. The unadjusted GST burden alone is 10 per cent but that is offset by the abolition of various other indirect taxes. Table 1 shows that the GST impact is equivalent to a burden of 4. That compares with 1. The major differences in the burdens likely to be experienced by the bottom and top quintiles are due to the enormous differences in the HES's estimates of the savings of the two groups.

The HES has the bottom quintile spending per cent of their income while the top quintile spends There are some reasons for thinking that these figures overstate the difference between spending and income for the lower income group. Some of the data problems can be understood by considering the following example.

Consider a family whose breadwinner experiences a sudden bout of unemployment that lasts six weeks. Before they experience the unemployment the family is a middle income household, perhaps in the third quintile. With the unemployment, income goes right down to the first quintile.

If now during that spell of unemployment we sample that family in a household income and expenditure survey we will find they are earning near the bottom of the income distribution but spending near the middle of the spending distribution.

Lower income groups contain people who are normally in a higher income group and spending according to the norms of higher income groups. The effect of those type of households is to bias the results towards overstating the dissavings of lower income groups. There are also a number of statistical problems raised by Treasury. Over a large enough sample that should give a good estimate of net expenditures on a flow basis.

The more the data are disaggregated the more the estimates are subject to large statistical errors. However, in this paper the total survey is only split into five income quintiles as in the published version of the HES. Hence this paper should not be subject to the sort of criticism that might be levelled at studies that rely on more disaggregated data made available by the ABS. A more serious problem for our purposes is the charge that the pensions and benefits identified by the HES do not add up to a total consistent with Department of Social Security figures.

In principle the under-reporting of pensions and allowances can be adjusted for when using the HES. Given the stigma of reporting social security payments in a survey context that seems a reasonably good success rate.

Nevertheless, we should be able to make some useful adjustments to the data to compensate for this known and quantifiable under-reporting. Applying a 21 per cent adjustment alone would mean that dissavings dissavings is the opposite of 'savings' and simply refers to people spending more than they earn rates for the bottom quintile come down from per cent of income to It should be possible to make other similar adjustments to the data to correct for other known biases arising from the survey.

In the Draft White Paper prepared before the tax summit, the Department of the Treasury used its own guesstimates, low income groups were assumed to spend 10 per cent more than their income while high income earners saved 15 per cent of their disposable income.

In the context of the present debate the Department of the Treasury does not appear to have allowed for the different savings rates and the implications they might have for the distribution of the burdens of the GST.

The present position put by Treasury simply says:. Given the use of the HES in calculating saving rates is not valid, there are two alternative approaches. Set the saving rate to zero. Use the population-wide saving rate implied by the National Accounts data.

If we use the assumptions in Table 1 above the GST impost is 2. That represents a substantial difference in the burden of the price effects of the tax package.