Cutting the GST

Cutting the GST   Dec.2, 2005
Stephen Harper and the Conservative Party's proposal to cut the GST in the coming years to 5 % if they become the Government of Canada is an interesting proposal. As the unemployment rate continues to decline, the latest figure is 6.4 % a very good and welcome sign , it is clear that the current tax regime in place will produce large structural surpluses even after the proposed tax cuts of the Liberal Government are implemented. Provided we can ensure that the Bank of Canada doesn't jump the gun on interest rate rises unemployment may well drop to as low as 5.5 %. The best weapon against poverty is a job.
So given this trend what are we to make of the proposed tax cut ? Let us remember that the low income citizen receives a regular tax rebate that covers part of what they pay in GST. So a tax cut in the rate would principally benefit the middle class tax payer who consumes a lot but gets no rebate. In many ways its a good anti -recessionary move . Some economists will complain that it encourages consumption when we want to be encouraging savings.

But in my view the best way to promote savings is to promote growth in incomes and lower unemployment. We make our decision to save out of income we receive. Its difficult to save if we lose our incomes.

The other problem with the proposed tax cut is the likelihood that whatever space the feds vacate the Provinces will seek to occupy. So implementing the tax cut so as to ensure it actually happens and is not eaten up by increases in Provincial sales taxes   will require careful negotiation.

Another alternative approach involves targeting certain groups of commodities that we might wish to privilege with a zero rating.Childrens' clothing, books, and other cultural products are often suggested for this treatment.

In any case given the structural surplus and falling unemployment the cut in the GST rate may well be an idea whose time has come.It will join the welcome income tax cuts that have already been proposed by the Liberals for Canadians to consider in the election.