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GST hike like another Tiger Woods girlfriend: Bad idea

By Kevin Gaudet
web posted February 15, 2010

Kudos to Liberal MP Gerard Kennedy for having let the tax-hike genie out the bottle. Recently, he went on national TV and speculated that Canadians would accept a hike in the Goods and Services Tax (GST). Mr. Kennedy deserves credit for putting this policy proposal in the window. It is only through such open and honest debate that such a poor idea can be thoroughly and resoundingly debunked and rejected.

Hiking the GST is a bad idea supported by a vocal few who can afford to pay higher taxes. It would be bad for the economy and would serve merely to fuel the federal government's already dangerous spending addiction.

Tax hikes for budget balancing is the easy path too often taken by politicians. Compare how often politicians name a program that should be reduced or eliminated versus how often they talk about a tax that should be raised.

The federal government needs more tax revenue like Tiger Woods needs another girlfriend. There's more than enough already. The problem isn't that we need more. The problem is not being mindful of what we already have.

To put the argument that "this deficit is only due to a drop in revenue" to the test, today's level of program spending should be put up against what that level would otherwise be if it had only increased by the combined rates of inflation and population growth – 2.5 per cent. Doing so from a base year of 2003?04 would yield a difference of $65.2 billion today, leaving a surplus of more than $10 billion. A similar analysis solely for the Harper government, from when it came to power in 2006?07, reveals the deficit today would be less than 9 per cent of what it is today; coming in at only $4.9 billion.

Importantly, this much smaller deficit would be truly cyclical, and not structural.

It is widely reported that the Harper government's reduction of the GST by two percentage points deprived the federal treasury of $12 billion it should have had to spend. This just isn't true.

The reductions of the GST rate, from 7 per cent to 6 per cent in July 2006 and from 6 per cent to 5 per cent in January 2008, have seen a GST revenue decline of only $10 billion, not $12 billion. GST revenue (net of rebates) was $33 billion the year before the reductions and is projected to fall to $23 billion this fiscal year. Not only has the revenue decline been much less than reported, but the decline also comes during the current recession, when all tax revenues have fallen.

Relatedly, those who favour a GST hike fail to note that total government revenue over the same period has only declined by $5 billion, most of which can be attributed to reduced revenues collected from business and personal income taxes. Again, this revenue decline also coincides with the current recession.

Raising taxes is a punishing approach to dealing with the recession. People in British Columbia and Ontario this year will already suffer a huge tax hike when the new harmonized sales tax kicks in; increasing the cost of services by 7 per cent and 8 per cent respectively. Adding another point or two to the GST would increase the cost of services by 10 per cent. As well, Nova Scotia's Premier also is considering a 2 percentage point increase on the HST. Talk should be about reducing taxes not hiking them further!

Increasing the GST will drive more tax avoidance and black market activity.

Hiking consumption taxes also hurts lower income earners more. Consumer expenditures as a proportion of income fall quite dramatically as income rises. This is because low income families must spend a much higher proportion of their income on essentials.

A GST hike is neither a good way to spur job growth, nor is it a good way to balance the budget. It is, at least, an honest proposal out in the open. Too often politicians aren't straight on tax issues. At least Mr. Kennedy is being honest about what he wants to do. ESR

Kevin Gaudet is the federal director of the Canadian Taxpayers Federation. © 2010, Kevin Gaudet

 

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