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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.

Suggested Citation

  • Michael Smart, 2006. "The GST Cut and Fiscal Imbalance," International Tax Program Papers 0604, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto.
  • Handle: RePEc:ttp:itpwps:0604
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    File URL: http://www-2.rotman.utoronto.ca/iib/ITP0604.pdf
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    References listed on IDEAS

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    1. Mintz, Jack & Smart, Michael, 2004. "Income shifting, investment, and tax competition: theory and evidence from provincial taxation in Canada," Journal of Public Economics, Elsevier, vol. 88(6), pages 1149-1168, June.
    2. Richard M. Bird, 2005. "Value-Added Taxes in Developing and Transitional Countries: Lessons and Questions," International Tax Program Papers 0505, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto.
    3. Maximilian Baylor & Louis Beauséjour, "undated". "Taxation and Economic Efficiency: Results from a Canadian CGE Model," Working Papers-Department of Finance Canada 2004-10, Department of Finance Canada.
    4. Richard M. bird, 2003. "Taxation in Latin America: Reflections on Sustainability and the Balance between Equity and Efficiency," International Tax Program Papers 0306, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto.
    5. 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.
    6. Richard Bird & Pierre-Pascal Gendron, 2000. "CVAT, VIVAT, and Dual VAT: Vertical ``Sharing'' and Interstate Trade," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 7(6), pages 753-761, December.
    7. 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, vol. 91(1), pages 126-140, February.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Andrew Sharpe, 2007. "Three Policies to Improve Productivity Growth in Canada," CSLS Research Reports 2007-05, Centre for the Study of Living Standards.

    More about this item

    Keywords

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

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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