The Conservative GST Cut Has Catalyzed Sales Tax Harmonization

Some economists have attacked the two-percentage point cut in the GST to 5 per cent proposed by the Conservatives in the January 2006 Canadian federal election. The main reason for this is that many economists believe that, if money was available for tax cuts, it would make more sense to use it to lower income taxes than the GST. This is because the personal income tax is, in theory, a relatively inefficient tax that penalizes savings. In practice, however, the income tax does not penalize savings as much because of the prevalence and widespread use of tax deductible savings plans and a new Tax-Free Savings Plan that can be used as an additional way to shelter interest income and that make the income tax more like a more efficient consumption tax. A neglected additional advantage of the GST cuts is that the lower GST rate they establish made it easier to achieve an agreement to harmonize provincial sales taxes with the GST, which is what happened in Ontario and British Columbia (although B.C. subsequently backed out). A lower 5-per-cent GST rate is becoming an accepted fiscal fact of Canadian life and is unlikely to be reversed.