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The GST Cut and Fiscal Imbalance

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  • Michael Smart

    ()
    (International Tax Program, Rotman School of Management, University of Toronto)

Abstract

The federal government is reducing its GST rate from 7% to 5%. We examine a broader reform in which this reduction in federal tax rates and revenues is accompanied by a similar reduction in federal transfers to the provinces. At the same time, the provinces may if they wish increase their own sales tax rates to make up the difference, while some provinces, including Ontario, reform their retail sales taxes to emulate the federal GST more closely. We analyze the likely impacts of such reforms on provincial revenues, tax incidence, and business investment. The result of combining these measures would be (1) a better ‘balanced’ federation, with less room for ‘blame-shifting’ between levels of government and consequently greater accountability at all levels, and (2) owing to the removal of the present surprisingly heavy tax on investment imposed by the provincial retail sales taxes an expansion in investment and, over time, in productivity, employment, and perhaps economic growth.

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File URL: http://www-2.rotman.utoronto.ca/iib/ITP0604.pdf
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Bibliographic Info

Paper provided by International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto in its series International Tax Program Papers with number 0604.

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Length: 30 Pages
Date of creation: Jun 2006
Date of revision:
Handle: RePEc:ttp:itpwps:0604

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Keywords: GST; fiscal imbalance; provincial sales taxes; accountability; competitiveness;

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References

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  1. Winer, Stanley L, 1983. "Some Evidence on the Effect of the Separation of Spending and Taxing Decisions," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(1), pages 126-40, February.
  2. Richard M. Bird, 2005. "Value-Added Taxes in Developing and Transitional Countries: Lessons and Questions," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper0505, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  3. Andrew Sharpe, 2003. "Linkages Between Economic Growth and Inequality: Introduction and Overview," Canadian Public Policy, University of Toronto Press, vol. 29(s1), pages 1-14, January.
  4. Maximilian Baylor & Louis Beauséjour, . "Taxation and Economic Efficiency: Results from a Canadian CGE Model," Working Papers-Department of Finance Canada, Department of Finance Canada 2004-10, Department of Finance Canada.
  5. Richard M. bird, 2003. "Taxation in Latin America: Reflections on Sustainability and the Balance between Equity and Efficiency," International Tax Program Papers, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto 0306, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto.
  6. Richard Bird & Pierre-Pascal Gendron, 2000. "CVAT, VIVAT, and Dual VAT: Vertical ``Sharing'' and Interstate Trade," International Tax and Public Finance, Springer, Springer, vol. 7(6), pages 753-761, December.
  7. Jack Mintz & Michael Smart, 2001. "Income Shifting, Investment, and Tax Competition: Theory and Evidence from Provincial Taxation in Canada," CESifo Working Paper Series 554, CESifo Group Munich.
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Cited by:
  1. Andrew Sharpe, 2007. "Three Policies to Improve Productivity Growth in Canada," CSLS Research Reports, Centre for the Study of Living Standards 2007-05, Centre for the Study of Living Standards.

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