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Grocery store owner Gilles Robin works on his fruits vegetable display on Nov. 28 2006 in the Breakeyville, Que.JACQUES BOISSINOT/The Canadian Press

Two of Canada's leading economists want Ottawa to reopen one of the hottest issues of the last two decades by expanding the GST to include food in grocery stores.

The two economists — Michael Smart of the University of Toronto and Jack Mintz, head of the School of Public Policy at the University of Calgary — say the way Canadian governments collect sales taxes is among the most inefficient in the advanced world.

By eliminating the exemptions such as medicines, books, financial services, tuition and especially food, governments could reap an additional $39-billion in revenue annually — about 60 per cent more than they do now.

That cash bonanza could be used to cut income taxes, fund social services, or both, or even to reduce by about 40 per cent the 12 to 15 per cent rates Canadians pay in harmonized sales taxes in most provinces.

Taking Ontario as an example, broadening the HST to treat all goods and services equally would make it possible to reduce the rate from 13 per cent to 8.5 per cent and still generate the same revenue, Smart says.

The challenge is the politics of the proposal, which even the economists admit would test the bravest of politicians.

"I'm not saying it is politically easy to do these things, I'm saying it's economically sensible," Mr. Smart said at a news conference Friday.

It's mission improbable, not impossible, agreed Mr. Mintz. He recalls that he started talking to then-finance minister Paul Martin in 1996 about the need to cut Canada's high corporate tax rate — also unpopular — and 16 years later, the country now has among the lowest rates in the G7.

"I think all these things are manageable," he said. "Tax reform takes time, but I think we can have significant GST reform over the next four or five years."

Mr. Smart and Mr. Mintz said they were sympathetic to the argument that poorer Canadians spend more as a portion of income on food, but that challenge is best solved by increasing the GST tax refund benefit specifically to those who need it. The problem with excluding food from sales taxes is that higher income Canadians also get a subsidy.

"I'd like to hear any politician try to defend that. I think it's indefensible," Mr. Mintz said, who added he had spoken about the matter to Finance Minister Jim Flaherty. He did not say what response he received.

The conclusions on the effectiveness of Canada's consumption taxes stem from a paper Mr. Smart delivered to a convention in Calgary last fall and was reissued, with some modifications, at an Ottawa news conference.

The debate over taxing food arose more than 20 years ago when former prime minister Brian Mulroney first proposed creating a federal sales tax on goods and services. Although the initial proposal had called for groceries to be included, the government so feared a backlash that it backed off even though it meant a higher setting for the GST.

In the 1993 federal election campaign, former Liberal prime minister Jean Chretien promised to repeal the tax and later was assailed by critics when his government never did.

The Harper government has seen political advantage in promising and delivering a two-point cut to the GST to five per cent.

"There is some evidence that taxpayers respond negatively to highly visible sales taxes on day-to-day purchases like groceries," is the way Mr. Smart describes the phenomenon in his paper.

The OECD (Organization for Economic Co-operation and Development) ranks Canada's GST relatively highly for efficiency, but Mr. Smart says the international body has it wrong. It credits the GST with all the tax generation, whereas now provincial consumption taxes bring in more revenue.

"In reality, Canada's VAT (value-added tax) is riddled with exemptions, rebates and reduced ratings that seriously damage its effectiveness," his report states.

"This paper makes the case for an ideal VAT. Taxing consumer commodities at a single rate reduces opportunities for tax evasion, keeps revenues steady and drastically simplifies compliances for businesses."

The economists say value added taxes, or consumption taxes, are preferable to other forms of taxation, and making Canada's VAT more efficient would help the economy.

The food exemption costs the economy about $1 billion through loss of efficiency and compliance costs, the paper calculates. In essence, Mr. Smart says, Canadians wind up buying too much discretionary food and too much prepared foods because they are tax-free, calculating a 10 per cent increase in the cost of food would cut consumption by two per cent.

Mr. Smart says only three countries exempt food from VAT taxes as completely as Canada, although in many it is hidden.

Aside from food, other exemptions cited by the paper includes financial services, residential rent, education, non-profits, prescription drugs and medical devices such as glasses , municipal services and small traders and other businesses. As well, new housing has rebates on values under $350,000.

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