While the Tories seem steadfast in their resolution to reduce the GST by 1%
in their upcoming budget, Canadians may wish to take a closer look at whether
this is actually in their best interest -- especially if the GST cut comes at
the expense of increasing personal income taxes.
The age-old debate comes down to whether you believe that consumption taxes
or income taxes are the best way for the government to collect its revenue.
Earlier this week, federal Finance Minister Jim Flaherty announced that
"Canadians will be better off under our plan than the previous government's [tax
plan]. Canadians will pay less tax."
A recent report authored by tax lawyer David Roberston, a partner at Fasken
Martineau in Toronto, titled "Don't tax me when I earn it, tax me when I spend
it" (www.fasken.com/GSTpaper_ Robertson) seems to suggest otherwise. Roberston
makes a strong case that Canadians would be better served by an income-tax
reduction than a GST cut.
The Conservatives have stated that to finance the GST cut, they will reverse
the Liberals' income-tax cuts and consequently increase the lowest tax bracket
rate from 15% back up to 16%, while at the same time decreasing the basic
personal amount -- the amount that Canadians can receive without paying any
federal tax -- by $500. The combined effect, according to Roberston, is worth
about $320 annually to most Canadians.
For the average Canadian to reap the same tax savings from a 1% GST cut,
however, he or she would need to spend at least $32,000 annually on goods and
services that are subject to GST.
In essence, this means spending more than $32,000 on goods and services other
than such things as rent or mortgage payments, groceries, drugs, most
health-care services, tuition and child-care expenses, all of which are GST
But is this actually reasonable?
Not according to Robertson, who maintains that any Canadian with a taxable
income between $9,000 and $50,000 annually would actually have to spend over
100% of his or her entire disposable income on GST-taxable goods and services to
reap the same amount of tax savings given up through the personal tax increases
-- clearly a nonsensical proposition.
Another question posed by Robertson is whether Canadians will ever actually
receive the full benefits of the GST cut. Many goods and services are already
priced with GST embedded or hidden in their costs. Take, for example, the cost
of gas, taxi fares or even movie tickets.
If a movie ticket currently costs $9.95 including GST, in order for the
average movie-going Canadian to reap the benefit of the 1% GST cut when she goes
to the movies, the theatre chain would need to reduce its selling price of the
movie ticket to $9.86. If it fails to do so, then the 1% GST cut never actually
ends up making it into the hands of "ordinary Canadians," but rather finds its
way to the bottom line of businesses who fail to pass on the savings.
So, what's the ideal solution? If the government is insistent on following
through with its GST cut, then why not combine that with the previously
announced personal income-tax reductions? Such a solution should be affordable,
given the huge budget surpluses of recent years and would meet the needs of all
Canadians -- both spenders and savers.
Want to share your own thoughts with the government? Then take the Tories up
on their offer to participate in the pre- budget consultation process. You can
e-mail your thoughts to them directly at: budget2006consult @fin.gc.ca. But
you'd better hurry -- the deadline is April 19.
Colour Photo: J. P. Moczulski, Reuters; Prime Minister Stephen Harper has the
money to keep his promise to cut the GST, as well as retain the Liberals'