Thursday, March 30, 2006

Harper's Key Principle: The GST Cut

I've been accused by a right-winger of lying about Harper's "five key principles". He started to retract the accusation and then went on and did it again. OK, let's look at these "five key principles", and then we'll see who is actually distorting the truth. This post will address one of those principles.

GST cut. Conservative claim - The Liberal income tax break at the lowest tax bracket did absolutely nothing for the one in three Canadian households who already pay no income tax. And you can't hide from the fact that lower income families spend a higher percentage of their income on necessities than high income families do.

Actually, the Liberal tax cut reduced the tax rate from 16% to 15% at the lowest tax bracket and it increased the personal exemption by $500. That increased the number of people who pay no tax at all and lowers the tax taken on those who pay tax in the lowest bracket. To say it did absolutely nothing for those in the lowest tax bracket is patently false. It is quite correct to say that those paying no income tax saw no benefit - they have no tax liability. And 500,000 people were relieved of paying any income tax as a result of the November tax cut.

The suggestion that a reduction in GST will benefit low-income Canadians because they spend a higher percentage of their income on necessities is ridiculous. Necessities, such as food and rent are GST exempt. Given that most low-income earners spend a greater proportion of their income on GST-exempt items, less money is available to purchase taxable goods. Hence a reduction in the GST rate has a minimal effect. If a person's income is below the personal exemption level there is little or nothing left to spend. If however, that person has the ability to spend $500 annually on taxable goods and services, the annual savings realized from a 1% cut to the GST amounts to 42 cents per month.

Further, Canadians at the lowest income levels (below $30,270.00) receive a quarterly GST rebate based on their gross annual income. Those at the lowest income levels, who pay no income taxes, receive the highest GST rebate. What Harper hasn't told us is whether a reduction in GST carries with it an accompanying reduction in the quarterly rebate to the lowest income earners.

The comment, "one in three Canadian households who pay no income tax", is deliberately misleading. The actual statistic is that 32% of tax filers pay no income tax. That includes stay-at-home spouses filing zero income returns in order to receive child-tax-benefits, owners of business who choose to have earnings taxed in the corporation and file a personal return with income below the personal exemption rate, plus a multitude of others who file returns in order to gain a benefit. Filing a "no tax" income tax return does not necessarilly mean the filer is poor. Further, a tax filer is NOT a household. There can be any number of tax filers in a given household.

A GST cut, with an accompanying return to pre-November 05 income tax rates does, however, body-slam the lower-middle and middle class. The federal tax cut returns an average of $246 annually to earners not receiving the GST rebate. In order to achieve the same $246 savings by way of a GST cut to 6%, a consumer would have to spend $24,600 on GST taxable goods and services. In addition the increase in the basic personal exemption gives a further $97 to those same earners. In order to save that using a GST cut you now you have to spend $34,343. If you spend less than the aforementioned $34,343 on taxable goods, you have just suffered a tax increase. Wealthy Canadians, with a much higher disposable income, have the ability to achieve more savings from a GST reduction then through an income tax reduction.

Oh, there's more. The cost of compliance will rise. A reduction in income tax produces a minimal compliance cost to government. A reduction in GST passes on a huge short-term compliance cost to businesses who have to change everything from cash registers to point-of-sale software to accounting programs. How does a business recover costs? Raise the price of a product or service.

The "marginal efficiency cost" is the cost to government of collecting taxes and is also relevant. In the last study conducted by the Canadian government (1997) the MEC for collecting income tax was 56 cents for every dollar collected. The MEC for collecting GST was 17 cents for every dollar brought in. And if you want a shock, look at the MEC for corporate taxes - $1.55 for every dollar taken in revenue. The most efficient tax to collect, according to the Canadian government and the Fraser Institute, is the GST. Just having the others is costly. It's little wonder economists are shaking their heads at Harper's ideas.

A reduction in the GST will have a positive immediate short-term effect on the poorest Canadians, however that doesn't make it a progressive tax. The greatest benefit falls to the wealthy who are able to neutralize the tax shift. But there is that return to higher tax rates which immediately impact the lower-middle and middle income earners and the fact that Harper vowed to reduce the basic personal exemption by $400. That will return somewhere between 300,000 to 500,000 Canadians, who were paying no income tax at all, to the status of taxpayer. That further reduces already meagre discretionary funds.

Harper has said he plans to simply eliminate the 2006 tax cut completely. CCRA will not be able to implement new tax tables until July 1st. That means that the government will be collecting 12 months worth of the increase in taxes off Canadian paychecks in a 6 month period. A 1% annual tax increase will look and feel like a 2% increase until January 2007 to everybody, including those who can least afford it.

If Harper really had the poor in mind, there were better ways to address them. Leaving the existing tax cuts in place and then providing a transfer of funds to those with low incomes would have been more effective. Leaving the GST at 7% and then increasing the amount of the GST rebate or even creating a GST prebate would have actually made the GST more progressive by effectively reducing the rate further at the low income level. An across-the-board cut leaves the GST in the category of a regressive tax, and adding low-income earners to the income tax roles in order to reduce a sales tax by 1% is even more regressive.

I said that Harper's GST cut was smoke and mirrors, and that the most benefit was gained by the wealthy. I have no reason to change that position.

1 comment:

Jon Sigurdsson said...

Thanks for the very detailed explanation!
Tax Advisor