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Taxing Consumption in Canada: Rates, Revenues, and Redistribution

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Abstract

The introduction of the VAT in Canada, initially in the form of the federal GST in 1991, did not signify a major change in the tax mix even after most provincial sales taxes also became VATs. Canadians do not pay much if any more in taxes on their consumption than they did 25 years ago. Although the GST and its provincial companions are not perfect, the evidence is that they create fewer barriers to investment and growth than the taxes they replaced so that Canadians appear as a whole to be better off than they were before setting off down the road to VAT. Nonetheless, perhaps in part because the VAT in Canada unlike in other countries is generally quoted separately (like retail sales taxes in the US) and hence highly visible, it continues to be politically unpopular and considered undesirably regressive. The major contribution of this paper is to examine in some detail and with some new evidence the incidence of Canada’s sales and excise taxes, a question that has received surprisingly little analysis. Because the share of total consumption taxes coming from sales rather than excise taxes has increased, these taxes are now less regressive than they were before the move to VAT, regardless of how incidence is measured. More importantly, there are solid arguments for using consumption than income as a basis for evaluating the progressivity of consumption taxes, and on this measure the GST and its companion taxes appear to be mildly progressive. However because the remaining excises are quite regressive even on this basis, on the whole the sales and excise system remains mildly regressive.

Suggested Citation

  • Richard Bird & Michael Smart & Jorge Martinez-Vazquez, 2016. "Taxing Consumption in Canada: Rates, Revenues, and Redistribution," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1605, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  • Handle: RePEc:ays:ispwps:paper1605
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    File URL: http://icepp.gsu.edu/files/2016/04/Working-Paper-16-05-1.pdf
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    References listed on IDEAS

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    1. Poterba, James M, 1989. "Lifetime Incidence and the Distributional Burden of Excise Taxes," American Economic Review, American Economic Association, vol. 79(2), pages 325-330, May.
    2. Bird,Richard & Gendron,Pierre-Pascal, 2011. "The VAT in Developing and Transitional Countries," Cambridge Books, Cambridge University Press, number 9781107401440, October.
    3. Gospodinov, Nikolay & Irvine, Ian, 2009. "Tobacco taxes and regressivity," Journal of Health Economics, Elsevier, vol. 28(2), pages 375-384, March.
    4. Chun-Yan Kuo & Thomas Mcgirr & Satya Poddar, 1988. "Measuring the Non-Neutralities of Sales and Excise Taxes in Canada," Development Discussion Papers 1988-08, JDI Executive Programs.
    5. Matthew Brzozowski & Thomas F. Crossley, 2011. "Viewpoint: Measuring the well-being of the poor with income or consumption: a Canadian perspective," Canadian Journal of Economics, Canadian Economics Association, vol. 44(1), pages 88-106, February.
    6. Lyon, Andrew B & Schwab, Robert M, 1995. "Consumption Taxes in a Life-Cycle Framework: Are Sin Taxes Regressive?," The Review of Economics and Statistics, MIT Press, vol. 77(3), pages 389-406, August.
    7. Davies, James B & St-Hilaire, France & Whalley, John, 1984. "Some Calculations of Lifetime Tax Incidence," American Economic Review, American Economic Association, vol. 74(4), pages 633-649, September.
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    Keywords

    sales tax; excise tax; value-added tax; incidence; progressivity;

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