Monti, L. “GST Alternatives” 
The New Federation 3.2 (1992): 25-27.

GST Alternatives
by Lome Monti

Life hasn’t been the same for most Canadians since the federal government embraced the religion of consumption taxes. The Goods and Services Tax (GST) was to be a uniquely Canadian incarnation of the Value Added Tax (VAT) which exists in, among other places, Britain and Germany. Unfortunately for the Tories, the imported version has not been without its flaws.
The significant difference between the Canadian and foreign models was Ottawa’s failure to secure an integrated Provincial and Federal Sales Tax (FST) system. As the European models demonstrate, this is crucial for an efficient tax collection process. Parallel federal and provincial systems undermine the efficiency of a consumption tax.
It all seemed so simple. Drop the 13.5% Manufacturers Sales Tax (MST), which penalized our exports by making them uncompetitive, and replace it with a 7% federal sales tax paid by the consumer on all goods and services except basic groceries. Wholesalers and retailers too would be taxed, but, unlike consumers, they would obtain input credits for any tax already paid at lower rungs in the retailing ladder. As a result, manufactured goods would be less expensive, Canadian factories would be more competitive, the tax would be revenue neutral, and the government would continue to collect $14 billion.
By now, most Canadians are aware of the Byzantine complexity of the tax. There is a feeling there may have been a simpler, more efficient and fairer way of raising the required revenue. Similarly, many Canadians believe they were knowingly misled about the dramatic impact of the GST. Among them there is the feeling that GST really means “God Save the Tories.”
For example, when critics pointed out most exported goods were either exempt from the MST, or qualified for refunds of the tax, they were discounted. In fact, tax experts estimate that less than 1% of the value of exports was passed on, and this was easily offset by a lower Canadian dollar.
When critics of the GST warned that applying a visible consumption tax would motivate consumers to avoid it by shopping in the U.S., they were dismissed as heretics. This handed Canada’s greatest trade competitor a distinct psychological advantage at the cash register.
Opponents who questioned the wisdom of imposing what was considered by many consumers to be a punitive tax at the onset of a recession were met with scepticism.
The government’s blind faith in the tax, despite the criticism, was reminiscent of the medieval practice of determining innocence by tying rocks to an accused and tossing him into a river. They assured everyone the tax, like an innocent defendant, would float.
Each time the chorus of dissent exceeded tolerable levels the House of Commons Finance Committee Chairman, Don Blenkarn, would come out in defense of the faith.
This surprised conservative critics like the Canadian Federation of Independent Business (CFIB) which warned the tax was hastily applied and ill-conceived without the cooperation of the provinces. They cautioned that not having the provinces on side made the tax inefficient and an administrative nightmare for small business.
These predictions have been confirmed by a recent survey of 25,362 members of the CFIB. The ten different provincial tax jurisdictions, coupled with a complex system of input tax credits and a relentless remittance schedule have produced enormous compliance costs for small businesses. Failure of retail prices to fall, as predicted by the government, is due in part to these increased administrative costs being passed on to the consumer. A Dunn and Bradstreet survey indicated that more than twenty-six percent of retailers raised their prices while only nineteen percent lowered them, and the vast majority – fifty-five percent – reported no change in the first four months of the tax’s implementation. Some prices did fall, however, when the economy imploded as a result of the recession. But it is clear bankruptcy sales were not what the government had in mind when it introduced the tax. Extrapolating its findings, the CFIB estimates the total cost to Canadian business of the GST in its first year of operation is $9.6 billion.
Economies of scale have meant the tax is regressive on small business. While for businesses with sales in excess of $5 million the average compliance cost is 0.18 percent, the average cost to businesses with sales of less than $100,000 is nine percent. Forty-five percent of Canadian consumers have reduced their purchases due to the GST, a public opinion survey commissioned by the GFIB in March of 1991 found. It is not difficult to imagine the devastating consequences this drop in revenue combined with increased administrative costs has had on small business added on top of the effect of the recession.
Ironically, of the sector which the GST was meant to benefit – manufacturing – only seventeen percent of the survey respondents experienced any positive effects.
The CFIB, in an effort to remedy some of the inherent flaws it perceives in the GST, has recommended a few alternatives. One such example is a Business Transfer Tax (BTT) which is multi-staged and assessed on a business’s books of record rather than its invoices. By eliminating many of the permitted exemptions it would be a simple tax with reduced compliance costs. In order to keep the rate at a modest level of four or five percent it would require the federal government to increase other taxes, as well as reduce transfer payments and expenditures to compensate for lower sales tax revenues. According to the CFIB a BTT would have the additional benefit of being administered by the present income tax service, thus reducing government expenses.
Harmonizing the GST with provincial sales taxes while maintaining the principle of revenue neutrality may be the most desirable option, according to the CFIB. By providing a similar base for documentation, rules of application, filing and auditing requirements, the administrative complexities and costs of the tax would be significantly reduced. If the government were to absorb the expense of collecting the tax as proposed in a 1987 Federal Sales Tax Reform document, the benefits would accrue directly to the business sector. Widening the Provincial Sales Tax (PST) revenue base might lead to the reduction of that tax rate, which in turn would lower the aggregate GST/PST to a more palatable level for the consumer. One problem though, according to tax experts: harmonization may be unpopular for a province like Ontario which receives approximately a third of its income from taxes on business inputs which are exempted from thee GST.
By far the most strident criticism of die GST is directed towards its shifting more of the tax burden from the corporate sector onto the backs of consumers. As Linda McQuaig contends in her book The Quick and the Dead, “this will inevitably become more pronounced as the government raises more and more revenue from thee GST.”
This was perceived by many as an attempt by the Tories to foist a corporate agenda on the Canadian taxpayer. The resulting hostility toward the government grew faster than a blister in tight shoes. Furthermore, the GST undermines the notion of progressive taxation which has been fundamental to our philosophy of fair taxation.
McQuaig, in an article written for This Magazine with tax law expert Neil Brooks, Associate Dean of Osgoode Hall Law School and Vice-Chair of the Fair Tax Commission of Ontario, observed that since 1984 taxes have risen by forty-four per cent on thee working poor, by ten percent on the middle class, while falling by six percent on upper income families. Tory income tax reform flattened out the federal tax rates, decreasing the number of tax brackets from ten to three while reducing the upper tax category from thirty-four percent to twenty-nine percent on a top rate of income of $55,000. This further erodes the notion of progressivity by making no distinction in tax rates between incomes of $55,000 and $555,000. All this served to reinforce the perception that Tory policy favoured the privileged at the expense of the middle class.
In 1989, Brooks and McQuaig proposed an alternative to the GST which eliminated the MST, while raising the equivalent revenue and preserving a progressive tax system. Their proposition was this: “Abolish the existing sales tax, but instead of replacing it with a massive new sales tax, raise the extra revenue entirely through income, corporate and wealth taxes.”
Among many suggestions, they advocate eliminating the business entertainment deduction which they maintain is subject to wide abuse and is impossible to police. They point out that its elimination in Britain and Australia had no harmful effect on local industries. The gain in revenue would be $1 billion.
Abolish the $100,000 and $500,000 lifetime capital gains exemptions except on the sale of personal residences - another $500 million gain.
Eliminate tax breaks enjoyed by real estate developers, which allow them to write off capital costs of a building at a rate of five percent a year even though the combined value of die building and land may be appreciating. Eliminate tax breaks for corporate mergers and acquisitions and tighten up tax rules for multinationals which allow them to borrow money in Canada to finance foreign subsidiaries while deducting the interest from Canadian income. Abolishing these three tax breaks and loopholes would equal another $1 billion in revenue.
Restoring the progressivity of the income tax system by raising rates would produce another $3.8 billion. Keep in mind the higher rates will have been partially offset by the abolition of the federal sales tax.
Of the major industrialized nations, only Canada, New Zealand and Australia do not have a wealth tax. As a result, point out Brooks and McQuaig, Canada has more billionaires per capita than any other major industrialized country.
With a combination of inheritance taxes and increased corporate taxes, which have been falling consistently since the fifties – Canada’s corporate tax rate is lower than that of the U.S., Britain, Italy or Germany – as well as a clamp down on tax cheaters, Brooks and McQuaig estimate their program would generate $14.5 billion in 1989 dollars. This is equivalent to the revenue generated by the MST. In a recent interview with The New Federation, Brooks stands by these original projections.
Many economists agree that the only efficacious means of lowering the GST is by applying it to every thing including basic groceries. William Watson and Christopher Ragan, both Professors of Economics at McGill University, have written articles for the Financial Post which advocate expanding the tax base of the GST to permit a rate reduction. Moreover, eliminating exemptions would reduce compliance costs.
In the event the aggregate GST/PST rate were to drop to ten percent, resistance to the tax might fall as well. Indeed, the CFIB have determined there is a 10% sales tax threshold which when exceeded induces consumers to avoid payment by various underground measures.
Since the wealthy spend more on food in absolute dollars, Ragan recommends the underprivileged should receive, in addition to their regular GST rebate, a payment in excess of their GST expenses on groceries. This acts as a wealth redistribution mechanism.
Unfortunately, this proposal does nothing to redress the problem of regressivity. As is the case currently with the GST, “there is no question that someone earning, say, $40,000 or $45,000 will pay a greater percentage of their income to the GST than someone earning $100,000 or $150,000, and they won’t get any benefit from the rebate,” remarks Neil Brooks.
There are various factions, including the Reform Party of Canada and American Democratic presidential candidate Jerry Brown, who advocate a flat tax rate as a model of improved taxation. This too would be regressive, however.
But what seems the simplest amendment to the present GST is to make it invisible. Canadian consumers blissfully pump gasoline into their cars oblivious to the enormous duties they pay on every litre, close to fifty percent in some cases. Reminded of this at every purchase they would rapidly become hostile. Hiding the GST would mitigate the resentment of paying the tax.
As must be clear by now, because of a confusing myriad of tax strategies devised by policy makers, we can only have sympathy for our politicians.
In the end, due to the recession, we will never know the genuine influence of the GST on the economy. It will collect close to the $16.35 billion predicted by the government. In this respect, “it has been recession proof,” comments Neil Brooks. As the Canadian economy continues to shift from a manufacturing to a service base, it is clear the taxation system must shift with it. What remains unclear, however, is whether the GST was the best alternative selected for the task.

Lome Monti is a Toronto free-lance writer.