Does Cutting the GST Make Sense?

As you’ve probably heard, Conservative Party leader Stephen Harper is proposing a 2% reduction in the GST. He’d cut 1% immediately, and another point in five years (the same length, not coincidentally, as his party’s potential term in office).

There appears to be some debate around the CPC’s math:

Liberals argued that the first-year savings would be closer to $250, basing their claims on Statistics Canada numbers that indicate a typical family earning $60,000 makes taxable purchases worth about $25,000 a year.

Such a family would have to spend upwards of $40,000 in order to realize $400 in savings in the first year – a number that’s not unreasonable, the Conservatives countered.

I’m no economist. I’m the farthest thing from one. In fact, if Vancouver was an economist, I’d be Colombo, Sri Lanka.

I’d thought it would be beneficial, then, to gather as many economists’ opinions as I could. These will probably initially come from the media, but I’ll keep an eye out in the blogosphere for more opinions. If you are or know an economist, please email me an opinion. This is going to be a long post, so if you’re not interested, bail out while we’re close to the ground. [more]

Economists in Favour of Cutting the GST

This CBC (a left-leaning organization, to be sure) article cites John Williamson, head of the Canadian Taxpayers Federation, a right wing organization. The link on Williamson’s name goes to his bio, which fails to describe him as an economist. I’m not sure what makes one an economist, so we’ll give him the benefit of the doubt:

But John Williamson, head of the Canadian Taxpayers Federation, came to Harper’s defence. "I think it’s a fine idea," Williamson said of Harper’s plan. " A lot of economists are suggesting that is it an unacceptable tax cut and I don’t think anything could be further from the truth."

He said economists are evaluating the Conservatives’ tax plan differently than the Liberals’ tax plan. Williamson said that when the Liberal plan came out to reduce personal income taxes, there was no talk among economists about whether their specific proposals were the best ideas.

"They are looking at the Conservative plan at what is the best tax cut measure and they are not doing the same for the Liberal tax cut plan."

He agreed, though, that the preference is to cut income taxes, but added he is waiting to see more tax cut proposals from the Conservatives.

Additionally, Mr. Harper himself is an economist, so he counts.

This one’s a little ambiguous, but Finn Poschmann of the C.D. Howe Institute offered this:

Finn Poschmann said he could only endorse the GST reduction if the Conservatives follow up with coherent changes to other taxes, and transfers to provinces.

This report argues that modifying the GST and/or the GST credit is a good option to help Canada’s poor. I was unable to find bios for the report’s authors, Andrew Mitchell and Richard Shillington, though they seem to be advocates for anti-poverty and social change issues.

Consumption taxes make up the largest part of the taxes paid by low-income people, with income taxes and social insurance contributions a distant second and third place. Changes to the income tax system will have limited benefits for low-income families. It is logical to look for changes in the consumption tax regime if the goal is to deliver benefits to low-income Canadians.

However, it would require much larger increases in the GST credit to deliver substantial benefits to low-income Canadians, and to offset the heavy consumption taxes they pay. Also, even though the GST credit was the option that delivered the highest proportion of benefits to low-income people it is important to recognise that a large increase in the credit would raise the income level at which families receive some benefit.

Economists Opposed to Cutting the GST

From Canoe.ca, we find Herbert Grubel’s opinion:

"It may be good politics, but it’s really dumb economics," said Finance Minister Ralph Goodale, borrowing the sentiments of economist Herbert Grubel, a senior fellow at the right-wing Fraser Institute and a former Reform MP.

Grubel and Harper, also a trained economist, were once caucus colleagues.

Grubel told the Vancouver Sun last month that "cutting the GST rather than business or personal income taxes may be good politics, but it is definitely very bad economics."

Jason Clemens and Niels Veldhuis are colleagues of Herbert Grubel at the Fraser Institute. They’ve written a commentary with the heart-racing title "Cuts taxes that count: Canadians would benefit far more from reductions in capital-based taxes and personal income taxes than from consumption tax cuts". Here’s the conclusion:

We agree that Canadians would benefit enormously from tax relief. However, we disagree with those that gravitate toward politically expedient tax relief in place of more economically productive tax relief. In addition, the evidence based on incentives, differing societal costs of taxes, competitiveness and the ability of tax relief to constrain government all lead to the same conclusion: reduce business taxes, taxes on investment and middle- and upper-income personal income tax rates while increasing our use of consumption taxes such as the GST.

Christopher Ragan is an economist at McGill University. He says:

"Stupid, stupid, stupid, stupid," said Christopher Ragan, a McGill University economist who favours the Conservatives. He said people may like it because "it’s the tax people love to hate."

Mike Veall teaches at McMaster (I note he’s also popular with his students). He says (same link as previous article):

"I believe it’s a poor idea," said economist Mike Veal of McMaster University in Hamilton. He said most economists would choose an income tax cut…

"One per cent on a car is fair amount of money," said Veall. "If you buying a chocolate bar then we’re literally talking about a penny." He said the GST makes a good target for politicians because it’s in front of the taxpayer every day.

Jim Davies is an economics prof at the University of Western Ontario. He says (same link as previous article):

"Most serious work done by economists who specialize in public finance indicates that the GST is a more efficient tax source than the income tax," he said. "If the income tax cut is designed properly it can provide similar benefit to lower-income taxpayers."

Benjamin Alarie is at the University of Toronto (same link as above):

Benjamin Alarie agreed that an income tax cut is the right route if the idea is to help lower-income people. "The move to increase the personal exemption of the income tax, if the concern is to help low-income Canadians particularly, that would be a nice way to do it," Alarie said.

Paul Sommerville is an economist who also happens to be running for the NDP in St. Paul. Thus, his comments ought to be taken with a grain of salt:

I think that Stephen Harper�s decision to the cut the GST is the height of fiscal irresponsibility (please see my blog, “Two Canadian Columnists I Like”, 21 November 2005). First, it will make the tax system less efficient. Harper�s proposal, once fully implemented, will increase the cost of collecting each GST generated tax dollar by almost 30%.

Second, it will entrench a bias in our tax system towards consumption instead of savings and investment. With an ageing population, fraying urban centres, and huge competitive challenges posed by the new technologies of the global economy, Canada needs more savings and investment, not consumption.

Robin Somerville of the Centre for Spatial Economics says:

Of all taxes we’ve got, the GST is least evil.

Undecided or No Preference Indicated

This article doesn’t clearly state Robin Boadway’s opinion–he just has an alternative strategy:

Robin Boadway, a Queen’s University economist, said there is another way to help low-income earners, by increasing the refundable GST tax credit. Boadway suggested the Conservatives are actually looking for way to cut government revenue and thus spending, with an eye to reducing the overall size of the federal government and bolster the provinces.

Kul Bhatia is another economist at the University of Western Ontario (article same as above):

Kul Bhatia said it looks like Harper was driven to cut the GST because the Liberals had already taken the income tax cuts. Bhatia said he doesn’t like tinkering with taxes at election time, especially with a tax like the GST, which was carefully tuned when it was brought in to balance income with tax credits for the poor…

The Conservatives say, though, that the cut would encourage people to spend more, providing extra GST revenue to make up the shortfall. Bhatia called that claim "tenuous" and said he’d like to see what the economic models say.

Conclusion

Obviously I’m in no position to rate the quality of these economists. Or rather, I’m unwilling to spend the time researching opinions of their relative merit. So far, though, there seems to be a strong case against cutting the GST. If anybody finds any further economists’ opinions on either side of this issue, please pass them along.