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Economy Lab

It's time for an adult discussion about HST/GST Add to ...

It is long past time that the NDP – and Canadian progressives in general – made their peace with the GST/HST and appreciated its potential for reducing poverty and inequality.

The following dialogue fairly characterises the interaction between economists and progressives on the topic over the past 20 years:

More related to this story

Progressive Person: How do we raise the tax revenues we need for the social programs we want to implement without tanking the economy?

Economist: Consumption taxes. Theory says that value-added taxes (VAT) such as the GST/HST are the least-disruptive way of generating tax revenue, and available evidence is consistent with the theory.

PP: But consumption taxes are regressive!

E: Yes, but we can correct for that using targeted transfers to low-income households so that they aren't worse off; that's what the GST/HST rebate is for. And there will still be lots left over to fund those social programs.

PP: But consumption taxes are regressive!

E: I know. But they introduce fewer distortions than the alternatives, and we can recompense low-income households for their lost buying power.

PP: But consumption taxes are regressive!

E: I'm not disputing that point, but there's more to the analysis than that. Okay, let me explain the effects of the various forms of taxes...

(20 years later)

E: ...and so we see that a consumption tax accompanied by direct transfers to low-income households is the most effective way of generating the tax revenues you want.

PP: But consumption taxes are regressive!



This is a frustrating state of affairs for an economist who would like to see governments do more to reduce poverty and inequality. Outside Canada, it is generally accepted that high VAT rates are an essential component of social policy: see the accompanying graph. Of the 21 OECD countries that spend more on social programs than does Canada, 19 have higher VAT rates. There are no rich countries that have pulled off the trick of sustaining high levels of social spending with low VAT rates.



VAT rates and social spending: 2007

Concerns about the regressive nature of the GST/HST can be addressed by improving the system of credits that compensate low-income households. Indeed, research suggests that the most effective way of reducing poverty and inequality is – surprisingly enough – to provide low-income households with more money. (See, for example, here, here, here and here.)



One of the more convenient features of the GST/HST is that it has already set up the infrastructure for transferring income to low-income households. The GST/HST tax credit can be used as a basis for an even more ambitious system of transfers at almost no additional administrative cost. All that is required is the political will to use it.



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