Jello Dithers may scrap GST

Recent rumblings from Ottawa indicate that Jello Dithers is contemplating keeping the Liberal campaign promise . . . from 1993. Reducing or eliminating the hated GST would certainly provide a short-term boost in popularity, but as The Raging Ranter observes, it would be a bad fiscal move:

Consumption taxes like the GST do far less damage economically than do income taxes. According to studies I have seen, consumption taxes reduce economic activity by about $0.26 for every dollar collected in tax. Income taxes, on the other hand, reduce economic activity by $1.40 for each dollar collected. Granted, these are only estimates, and such data is extremely hard to calculate accurately, but it is a well known fact that income taxes are far worse for the economy than consumption taxes.

The GST currently pulls in about $40 billion per year. That is enough to reduce everyone's income tax bill by about 45 per cent. Or, if the income tax cuts were weighted towards the lower and middle income earning brackets, millions more Canadians could be paying no income tax at all. Besides, the GST is not charged on groceries or apartment rent, so the poor do not pay much in GST as it is. Throw in the quarterly GST credit (that would disappear if the GST were eliminated) and the poor would be worse off for getting rid of the tax.

I haven't seen these studies that Darryl refers to, and I wonder if the studies properly account for the deadweight costs of administering and collecting the tax (largely unpaid work by companies, rather than paid work by civil servants). Either way, I am the last one to argue in favour of any tax as being "good": the lower the taxes, the less freedom the government has to take away your freedom. That aside, however, it does make sense to tax consumption rather than income: taxing consumption does not directly punish savings or higher income, while income taxes punish disproportionally at the margin (that extra dollar you might earn by working a bit longer is worth much less than the first dollar because it is taxed more heavily).