Losses to society outweigh benefits of tax cuts

Promises of tax cuts offer marginal short-term benefits

Columnist Andre Carrel (File photo)

Columnist Andre Carrel (File photo)

By André Carrel

As we approach the annual due dates for income and property taxes, my thoughts go to the range of consumption taxes we pay every day. The history of one such tax, the federal Goods and Services Tax (GST), is edifying.

The GST’s ancestor is the Manufacturers’ Sales Tax (MST) introduced in 1924. The MST in turn was a compromise solution to resolve a political storm caused by the introduction of the federal turnover tax enacted in 1920. The turnover tax was to cover the massive expenditures incurred by our participation in the First World War.

As the name indicates, the MST was levied at the manufacturing stage of products. The tax was hidden in the cost of goods sold to wholesalers and distributors. At the retail level, customers could not know how much of a product’s price related to its production and how much to taxes paid to the federal government.

In 1989 the federal government decided to replace the MST. Industry had been asking the government for a change on the grounds that this hidden tax placed manufacturers at a disadvantage in international trade. Consumers at the time could not know how much federal tax was included in the price of a $5 toothbrush. The new tax was to be distinct in three attributes. The new tax was to be applied to goods as well as to services; it was to be collected at the retail level, and the amount of tax payable was to be openly declared, visible to consumers.

Expanding the tax base to include services allowed the GST to be set at a lower rate than the MST to match the revenue generated by the latter. Economists had calculated that a GST rate of 9 per cent would be required to replace the revenue generated from the MST’s 13.5 per cent. Politically, however, a 9 per cent federal sales tax on previously untaxed services, although revenue-neutral overall, was problematic. Expanding the tax base would lower the cost of goods, but it would represent a marked increase in the cost of services. The GST was enacted in 1991 at the politically tolerable rate of 7 per cent. In 2006 the federal government lowered the GST to 6 per cent. In 2008 the rate was further reduced to 5 per cent.

Today, as a result of decisions made essentially for short term political gain, the GST at 5 per cent generates slightly more than half the revenue it would generate if it had been set and retained at the originally calculated rate of 9 per cent. At 5 per cent, the GST on a $5 toothbrush is 25¢; at 9 per cent it would be 45¢. What benefit do I derive from the 20¢ left to me by the lower tax rate? What are the consequences for society today resulting from the politically motivated GST rate reductions of 1991, 2006, and 2008? Today, society is left to cope with health, education, public safety and other services stretched to their limits and beyond. User fees, particularly in the field of higher education, have been raised to unconscionable levels.

The GST’s historic lessons are that, for the vast majority of citizens, promises of tax cuts offer marginal short-term benefits.

Those benefits do not and cannot compensate individual citizens for the losses society will invariably experience if we deprive our public services, the foundation of our standard of living, of the financial resources essential to sustain them over the long term.


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