Wednesday, October 31, 2007

GST Cut

The government provided their economic update today. It called for a 1% GST cut on January first as well as some retroactive income tax cuts to the beginning of this year. There are also plans for future income and corporate tax cuts that will be included in the budget next year.

The plan will come to a confidence vote in the house of commons tommorrow. The NDP and Bloc will be voting against the cuts because they are looking for more government spending. The Liberals who oppose the GST cut are not stupid enough to topple the government on a tax cut. They are in favour of the income and corporate tax cuts so they will be able to vote with the government. In the last few days it has been hinted that we may see the Liberals propose undoing the GST cut in their election campaign.

There are many people making the argument that cutting the GST over personal tax cuts is bad because it rewards the rich more than the poor. The GST is a regressive tax and by it's very nature takes a higher percentage from the poor than the rich.

There are seniors that are retired on fixed income that pay no or minimal income tax but they do pay GST. There are working Canadians who's income either is less than the minimum for paying income taxes or are only partway into the lowest tax bracket. There are Canadians who are students or unemployed that are not paying income tax. These groups are most in need of a tax cut and benefit more from a GST cut than an income tax cut.

On the flip side the wealthy are able to save more because they spend more. Some of the members of the first group in theory could be paying GST on 100% of their earnings. The wealthy are able to generate savings and will only pay GST on a fraction on their income. The wealthy are also able to get the maximum benefit from any income tax cuts. This is why regressive consumption taxes hit the poor at a higher rate than they hit the rich.

In the long run eliminating the GST is a sound policy that benefits all Canadians. Combined with other types of tax cuts proposed today will help reduce tax burden on all Canadians and provide a healthy economic future.

1 comment:

Canadian said...

You're the only person on the planet who thinks cutting the GST is "sound" policy. Economists were unanimous in condemning the move the first time the Cons cut it, and their opinion hasn't changed. Even the OECD, IMF and World Bank criticised the move. It is simply bad economic policy. It is however, brilliant politics.