# GST Cuts - Government self-sabotage?



## gimme_divies (Feb 12, 2011)

I don't want this to turn this into a political debate, but I came across a study published by CGA Canada back in 2008 that discusses the cost-benefit of the cuts (2*1%) to the GST back 2006 and 2007 and whether the loss in tax revenue (~$10B per year) would be recovered through increased consumer spending, lower personal debt levels, and so-on. 

http://www.cga-canada.org/en-ca/ResearchReports/ca_rep_2008-03_gst.pdf

Here is a quote from the report that infuriates me:

"In 2004, Department of Finance Canada undertook a study that compared the impact of seven
different tax measures on domestic welfare. The study looked at the degree to which changes
in the tax mix affect households’ and businesses’ decisions about consumption, investment
and participation in the labour market. The measures were ranked based on the magnitude of
improvement they bring to economic well-being; a concept that reflects our level of satisfaction
with the amount of goods and services we consume and the amount of leisure time we have.

The measures examined by the study included (i) a cut in personal capital income taxes, (ii) a cut
in sales taxes on capital goods, (iii) a cut in corporate income taxes, (iv) a cut in personal income
taxes, (v) a cut in payroll taxes, (vi) a cut in consumption taxes, and (vii) an increase in capital
cost allowances on new capital. *Surprising or not, the study found that reducing consumption
taxes would bring the smallest improvement to the overall well-being of Canadians*."

Now, two things that bother me about this:

1. The cuts cost the Government $10B in revenue per year, and nobody cares, despite this being a major contributing factor to our current deficit situation. It is actually still considered one of the great accomplishments of Mr. Harper. 

2. The GST cuts did nothing to change spending habits, resulting in monthly cash flow increases ranging from $9-27 for Canadians. BIG WHOOP!

Consuption taxes are among the most (if not THE most) efficient taxes that exist and the fact that the Government knew this (it was the DoF that conducted this study), yet intentionally cut $10B from annual revenues tells me that there is much more to the story than meets the eye. The fact that this is not common knowledge is truly sad and indicates that Canadians are very naïve. To put it in perspective, the GST cuts cost $10B per year, vs. $3.6B that was the amount transferred to the Federal Public Service Pension board in 2011-12.

So, am I missing something, were the GST cuts actually a fine idea and did they do what they were supposed to?


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## MoneyGal (Apr 24, 2009)

The whole GST schmozzle rests on the fact that it is "visible" tax vs. the old "hidden" manufacturer's tax. Finance recommended that the new tax (GST) similarly be a hidden/non-visible tax, way back when. 

However, left with a visible tax, the govt of the day can score political points by visibly cutting the visible tax, even if a majority of Canadians are not better off than they would be with other, less visible changes (such as the other options identified in your snippet).


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## sags (May 15, 2010)

What is troublesome for me is that this government has a long habit of seeking information and advice from a wide range of experts...........and then promptly throwing it all in the garbage can to follow the path their ideology leads them.

Maybe it is a flaw in all governments, but I can't remember it as pronounced as it is with the Harper government.

They have ignored expert advice on the GST cuts, mandatory minimum sentencing, and just a couple of days ago voted against an enhancement of the CPP.

We all have our own beliefs, but when faced with overwhelming contrary expert advice........I think most of us would tend to accept that we could be wrong and consider change.

If the possibility of change of attitude isn't going to happen, why bother seeking advice?

This government, which basically is controlled by Harper through the PMO, is myopic and indifferent to the opinions of others, including experts in the field.


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## none (Jan 15, 2013)

^ Exactly.

That's what is so infuriating about the current government. If multi-billion dollar decisions are going to be made why AREN'T they using the best data and information available? It's crazy.


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## Eder (Feb 16, 2011)

I tend to trust the performance of governments that cut taxes more than governments that raise taxes...I've had a reasonably large sample size.


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## MoneyGal (Apr 24, 2009)

Every single one of the options supplied was a tax cut. The issue is they picked the most visible, least effective one.


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## Taraz (Nov 24, 2013)

Yeah, the Liberal plan (back then) to cut the income tax would have been way better than the 2% sales tax cut (especially for people like us) and way easier to implement. I'm strongly in favor of consumption, luxury, and sin taxes, because they discourage consumption.


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## none (Jan 15, 2013)

MoneyGal said:


> Every single one of the options supplied was a tax cut. The issue is they picked the most visible, least effective one.


Nailed it.


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## SpendLessEarnMore (Aug 7, 2013)

A politician keeping his campaign promise. Wowzer. Can't always win. Being in Alberta and doing most my buying online a 5% tax is more welcoming than a 13% tax in Ontario.

http://news.nationalpost.com/2011/01/15/harper-five-years-in-power-campaign-promises-vs-reality/


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## none (Jan 15, 2013)

Sure he kept his campaign promise but that doesn't mean the promise wasn't stupid. Keep in mind that he received just a bit more than 1/3 of the votes. Sure with our silly first past the post system that is enough to give him a strong majority but really his policies are not representative of the vast majority of Canadians. If America has taught us anything: a vocal minority can cause a lot of damage when they put their mind to it.

Anyway, fair is fair I guess. The Liberals enjoyed a lot of benefits from the split right before harper united it. Turn around is fair play I guess, or our electoral system is stupid.... or both.


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## Nemo2 (Mar 1, 2012)

I seem to recall that, some 17 years ago, "Pass the Tequila, Sheila" Copps resigned, (and was subsequently re-elected), over an unfulfilled, (and even denied), promise by Jean Chretien to abolish the GST........the low information electorate of the time, not understanding that the previously hidden tax was simply made visible, wanted it to disappear again........the Liberals incorporated that meme into their platform...until it became inconvenient...then..."Look, a squirrel!"


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## andrewf (Mar 1, 2010)

Maybe we just need a party to promise to make the GST/HST 'disappear', by including it in the posted price of goods. They can argue that it will make the cost of goods clearer and more transparent to consumers, and some goods already have the tax included in the price (gasoline/diesel fuel).

Sure it may seem nice to pay 5% in Alberta rather than the 13% in Ontario, but you're making those purchases with after-tax income that is lower than it might have been, had income taxes been cut rather than the GST.


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## sags (May 15, 2010)

Alberta is also in a deficit position, and increased taxation is on the political table now.....or continue going into deeper debt.

Cutting taxes, is great thing.........but first they have to cut spending, and that is never easy.

Harper financed the GST cut by blowing through a surplus and deficit spending.

That isn't good economics.

Instead of facing an economic downturn with a strong economy and surplus budgets, as we did last time.......we would be facing an economic downturn with a weak economy and deficit budgets.

It may very well be a rougher ride this time around.


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## andrewf (Mar 1, 2010)

Indeed. Canada's debt is about $75 billion higher today than it would have been had Harper not cut the GST. That's nearly 12% of our current debt.


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## wendi1 (Oct 2, 2013)

I think the GST should not only be included in prices, there should be no exceptions. No food exceptions, no school supplies exceptions, no "used housing" exceptions.

That would vastly simplify the collection of the tax, and make it fairer. 

But I'm a dreamer. No one will vote for me...:neglected:


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## GoldStone (Mar 6, 2011)

sags said:


> Cutting taxes, is great thing.........but first they have to cut spending, and that is never easy.
> 
> Harper financed the GST cut by blowing through a surplus and deficit spending.
> 
> That isn't good economics.


It's bad economics, but it may be good politics.

It's not easy to cut spending when the books are balanced. Special interest groups will eat you alive.

Solution? Cut an unpopular tax to manufacture a deficit. Then cut spending in the name of balancing the books.

GST cut is not easy to revert because GST is so unpopular. By cutting the GST, Harper tied the hands of the future Liberal governments. Harper's master plan is to make the federal government smaller. I suspect that cutting the GST was a very strategic move. Starve The Beast.


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## wendi1 (Oct 2, 2013)

Starve the beast only works if you don't allow deficit spending.

Otherwise, it's "the grandkids can pay for this". Greedy politics and bad economics, both.


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## Canadian (Sep 19, 2013)

HST in my province is 15%. Do we complain about it? Sure. Do I forgo spending because of it? No - if I need it [or want it] I buy it. Would I buy more "stuff" if HST were reduced? No - I don't need more "stuff".

HST cutting is simply an election mechanism used to swoon the voters who don't fully think things through. I would rather continue to pay a couple dollars [or even tens or hundreds for larger purchases] here and there, in steady increments, than see deficit-riddled governments continue to increase the debt burden. Taxpayers need to fund the country's services one way or another. If it's not through HST it will be another way - like income taxes, which are high enough IMO.

Another thought is maybe we already pay more than enough taxes. Maybe a responsible allocation of spending with existing tax funding is the better alternative to balance budgets! But let's save this for another conversation... ig:


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## gimme_divies (Feb 12, 2011)

Thanks all for your replies. So it seems pretty clear that the cuts to the GST was intentionally bad policy in the name of buying votes. But as GoldStone mentioned, I can see this deficit as having been convenient for the Conservatives allow them to scream "Economic Crisis!" and then pass through various new policies in response to the deficit that must be dealt with at all costs. Of course, we know now that shortly afterwards, there actually was an economic downturn that made what was thought to be a modest deficit into a significant one that has become extremely difficult to tackle.

It was risk management at its worst, and it ended up biting us all in the rear.


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## HaroldCrump (Jun 10, 2009)

The effects of the 2% GST cut have been muddled because of the ensuing recession of 2008 - 2009.
At that time, the federal budget was in balance.
It went out of balance because of all the stimulus programs and the need to keep up public sector employment to offset the unemployment in the private sector.

I recall reading the monthly jobs data and for a long period of time, the govt. was desperately creating fake employment in the public sector to try and offset the jobs lost in the private sector.

Just as one example, this jobs report:
http://www.680news.com/2012/07/06/c...te-falls-to-7-2-in-june-but-few-jobs-created/

_"Most of the gains last month occurred in the public sector, which saw a large 38,900 gain, while the private sector shed 26,000 jobs. 
Self-employment fell by 5,500.
Statistics Canada said the biggest gains were in building and other support services, where employment rose by about 24,000.
Health care and social assistance added 20,000 and there was a gain of 19,000 in educational services."_

There was massive public sector spending to avoid slipping further into recession, or even a depression.
Our unemployment rates reached into the low 8% range.
Around 10% or so it would have gotten out of control.

It is pure speculation for us to sit here today and try to judge what might have been had there not been a recession.
Perhaps the budget would be nicely balanced with even a surplus.
Perhaps the GST could have been cut another 2%.
Perhaps there would have been income tax cuts.
Who knows.

I agree that consumption taxes are the least evil among all the forms of taxation.
I am also in favor of income tax cuts instead of consumption tax cuts, as long as the income tax cuts are across the board in all the brackets.


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## Canadian (Sep 19, 2013)

gimme_divies said:


> So it seems pretty clear that the cuts to the GST was intentionally bad policy in the name of buying votes.


Big time. It seems appealing on the surface because it appeals to those who [in economic terms] have a high discount factor. The value they place on [usually larger] future rewards is much less than the value of an instant reward. These people are excited now they will save a few dollars off their new iPad or car but they will also be the first to complain in 20 years that the government can't afford to continue providing services.


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## andrewf (Mar 1, 2010)

Harold, there was a structural deficit before the recession hit. The nature of a structural deficit allows there to be a surplus when GDP is above potential, but over a business cycle there is a net deficit. The PBO was projecting a deficit before the government implemented the stimulus package they committed to at the G20 meeting in the Fall (before any of the coalition drama). I remember the sequence of events pretty well. There seems to have been an attempt to revise history, to shift the blame for the stimulus spending onto the opposition, when the government committed to it internationally months before. The coalition drama was over the government's volte face in the Nov economic update, reneging on the pledge to introduce stimulus measures and actually cut spending in a number of areas to justify their (then laughable) projected surpluses.

I wasn't really keen on the idea of using fiscal stimulus willy-nilly. I was supportive of accelerated infrastructure spending, but not so keen on the granite countertop and hardwood floors tax credit. I would have preferred sending every adult a cheque.


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