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The Economic Incidence of Replacing a Retail Sales Tax with a Value-Added Tax: Evidence from Canadian Experience

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  • Michael Smart
  • Richard M. Bird

Abstract

A decade ago, several Canadian provinces replaced the retail sales taxes with value-added taxes. This paper estimates the effects of this tax substitution on consumer prices in the reforming provinces. Consistent with theory, we find that the resulting effective tax-rate changes were shifted forward to consumers in most sectors of the economy. The overall effect on tax-inclusive consumer prices was small, albeit perhaps somewhat regressive.

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  • Michael Smart & Richard M. Bird, 2009. "The Economic Incidence of Replacing a Retail Sales Tax with a Value-Added Tax: Evidence from Canadian Experience," Canadian Public Policy, University of Toronto Press, vol. 35(1), pages 85-97, March.
    • Handle: RePEc:cpp:issued:v:35:y:2009:i:1:p:85-97
    DOI: 10.3138/cpp.35.1.85
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    References listed on IDEAS

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    1. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and Taxation: Theory and Evidence," American Economic Review, American Economic Association, vol. 99(4), pages 1145-1177, September.
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    6. Patrick Blagrave, 2005. "An Analysis of the Impact of the Harmonized Sales Tax on Provincial Revenues in Atlantic Canada," Canadian Public Policy, University of Toronto Press, vol. 31(3), pages 319-332, September.
    7. James P. Feehan, 1985. "Provincial Government Taxation of Clothing and Footwear: Revenue and Equity Aspects," Canadian Public Policy, University of Toronto Press, vol. 11(1), pages 26-39, March.
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    Cited by:

    1. Petr David, 2012. "Distribution of the increased tax burden for agricultural products and food in the Czech Republic," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 58(5), pages 239-248.
    2. Clément Carbonnier, 2011. "Shifting on prices of per unit and ad valorem consumption taxes," Working Papers halshs-00872477, HAL.
    3. Yingxu Kuang & Ted Englebrecht & Otis W. Gilley, 2011. "A Distributional Analysis of the FairTax Plan: Annual and Lifetime Income Considerations," Southern Economic Journal, John Wiley & Sons, vol. 78(2), pages 358-381, October.
    4. Richard M. Bird & Michael Smart, 2012. "Financing Social Expenditures in Developing Countries: Payroll or Value Added Taxes?," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1206, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    5. Bibek Adhikari, 2015. "When Does Introducing a Value-Added Tax Increase Economic Efficiency? Evidence from the Synthetic Control Method," Working Papers 1524, Tulane University, Department of Economics, revised Nov 2015.
    6. Mukherjee, Sacchidananda, 2023. "Distributional Impact of Indian GST," Working Papers 23/403, National Institute of Public Finance and Policy.
    7. Carbonnier Clément, 2013. "Pass-through of Per Unit and ad Valorem Consumption Taxes: Evidence from Alcoholic Beverages in France," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 13(2), pages 837-863, September.
    8. Hansen, Benjamin & Miller, Keaton & Weber, Caroline, 2022. "Vertical integration and production inefficiency in the presence of a gross receipts tax," Journal of Public Economics, Elsevier, vol. 212(C).
    9. Ağca, Şenay & Igan, Deniz, 2019. "Fiscal consolidations and the cost of credit," Journal of International Economics, Elsevier, vol. 120(C), pages 84-108.
    10. Hoseini, Mohammad & Briand, Océane, 2020. "Production efficiency and self-enforcement in value-added tax: Evidence from state-level reform in India," Journal of Development Economics, Elsevier, vol. 144(C).
    11. Bev Dahlby & Ergete Ferede, 2011. "What Does it Cost Society to Raise a Dollar of Tax Revenue? The Marginal Cost of Public Funds," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 324, March.
    12. Zhao, Renjie & Zhang, Jiakai, 2022. "Rent-tax substitution and its impact on firms: Evidence from housing purchase limits policy in China," Regional Science and Urban Economics, Elsevier, vol. 96(C).
    13. Martin Mellens & Hendrik Vrijburg & Jonneke Dijkstra, 2014. "Robust estimation of the VAT pass-through in the Netherlands," CPB Discussion Paper 297, CPB Netherlands Bureau for Economic Policy Analysis.
    14. Santiago Acosta-Ormaechea & Atsuyoshi Morozumi, 2021. "The value-added tax and growth: design matters," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(5), pages 1211-1241, October.
    15. Zhang, Yan & Bai, Zhuoran & Findaly, Christopher, 2021. "Value-added Tax Reform and Services Exports: Evidence from China," MPRA Paper 111184, University Library of Munich, Germany, revised 2021.
    16. Richard M. Bird, 2012. "The GST/HST: Creating an Integrated Sales Tax in a Federal Country," SPP Research Papers, The School of Public Policy, University of Calgary, vol. 5(12), March.
    17. Ferede, Ergete & Dahlby, Bev, 2012. "The Impact of Tax Cuts on Economic Growth: Evidence From the Canadian Provinces," National Tax Journal, National Tax Association;National Tax Journal, vol. 65(3), pages 563-594, September.
    18. Santra, Sattwik & Hati, Koushik Kumar, 2014. "India’s Move from Sales Tax to VAT: A Hit or Miss?," MPRA Paper 54542, University Library of Munich, Germany.
    19. Martin Mellens & Hendrik Vrijburg & Jonneke Dijkstra, 2014. "Robust estimation of the VAT pass-through in the Netherlands," CPB Discussion Paper 297.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    20. Bev Dahlby & Ergete Ferede, 2012. "The effects of tax rate changes on tax bases and the marginal cost of public funds for Canadian provincial governments," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(6), pages 844-883, December.
    21. Netherlands Bureau for Economic Policy Analysis, 2015. "Study on the economic effects of the current VAT rules for passenger transport," Taxation Studies 0055, Directorate General Taxation and Customs Union, European Commission.
    22. Iswahyudi, Heru, 2020. "The problem of gross receipts taxes in Indonesia: Economic distortions and policy options," MPRA Paper 100617, University Library of Munich, Germany.
    23. Clément Carbonnier, 2011. "Shifting on prices of per unit and ad valorem consumption taxes, estimation on prices of alcoholic beverages in France," THEMA Working Papers 2011-20, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.

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