COLUMN

The Tories’ new sales tax could be a windfall

Income tax cuts could follow introduction of the new nine-per-cent federal sales tax, but no one is sure when —and by how much

DIANE FRANCIS August 7 1989
COLUMN

The Tories’ new sales tax could be a windfall

Income tax cuts could follow introduction of the new nine-per-cent federal sales tax, but no one is sure when —and by how much

DIANE FRANCIS August 7 1989

The Tories’ new sales tax could be a windfall

DIANE FRANCIS

COLUMN

Income tax cuts could follow introduction of the new nine-per-cent federal sales tax, but no one is sure when —and by how much

Finance Minister Michael Wilson has been putting finishing touches this summer to his much-vaunted goods and services tax. Already, it is under attack even though it is not scheduled to begin until Jan. 1,1991. That is because it represents the single biggest revenue grab by a Canadian government in our lifetime. The bite is so huge that, opponents claim, it can single-handedly cause a recession, retard economic growth and hobble businesses with burdensome paperwork. Even so, there’s little doubt it will become a reality. Canadians traditionally take their taxes lying down. After all, this is not the society that decided to rebel by throwing tea into the harbor.

South of the border, tax hikes of smaller proportions incite the wrath of electorates and even spark new political movements. California’s series of antitax ballot propositions in the 1970s helped elect America’s foremost taxbaiter, Ronald Reagan, who presided over eight deficit-driven years in the White House. Here in Canada, electorates allow politicians to part them peacefully from their money but, in return, expect it back in the form of gold-plated government services or other goodies. And this tax is no exception. Wilson’s goods and services tax is part of the government’s future agenda, which will result in substantial income tax cuts for voters before the next federal election.

Income tax cuts will be possible because this new sales tax will generate huge surpluses for Ottawa. It replaces a levy on manufactured goods, ranging from eight to 13.5 per cent. Although the new tax is lower, in most cases, than the manufacturers’ tax, it will be levied on more goods and for the first time will include services. As a result, the new tax will result in much greater revenues for the federal government. The nine per cent will not only apply to a wide range of goods, but will also include previously untaxed services by brokers, bankers, realtors, lawyers, accountants and plumbers, electricians and tradesmen. Tax-exempt

will be unprocessed fishery and farm products, exports, medical supplies, groceries (not including restaurant meals), legal aid, educational services, health or dental services, day care and residential rents.

Estimates are that, for every percentage point of this tax, Ottawa will reap between $2.5 billion and $3 billion. That means that the tax will raise $22.5 billion at the very least. At the most, it will raise $27 billion in one year. This is considerably more than the $18 billion raised last year by the federal manufacturers’ sales tax. Such a windfall of $4.5 billion to $9 billion per year could be used to reduce the deficit, spent on government services, or returned as tax cuts. Tory MP Don Blenkarn, whose parliamentary finance committee will conduct public hearings this fall into the new tax, said that the government’s agenda is to return the largess to taxpayers. Income tax cuts would likely be the greatest for taxpayers' in the biggest voter bloc, those earning from $27,500 to $55,500. Blenkarn says that cuts will be in place before the new tax starts on Jan. 1, 1991. I would guess that Wilson will wait and see exactly how much revenue is generated, then announce cuts in that spring’s budget.

The tax is a politician’s dream because it will

be less visible than income tax and difficult to evade. It is also a revenue money machine, which could be adjusted to maximize political benefits. If the Canadian goods and services tax were set at 23.46 per cent, as it is in Sweden, the Tories could abolish their federal income taxes for individuals and still collect about the same revenue. If it were set at Britain’s rate of 15 per cent, Ottawa could halve all income taxes. As it is, at Wilson’s nine per cent, the tax may give the government a $9-billion windfall and income taxes could be reduced by 15 per cent across the board. Far from a political death knell, this new tax will be a Tory trump card.

Politics aside, income tax cuts make good economic sense. The Conference Board of Canada warned in June that, without income tax cuts, the new goods tax could trigger a recession in 1991. That is because of the huge amounts of money the tax would siphon away from economic growth. At the same time, however, the board agreed that the tax could be beneficial in the long run because it replaces Canada’s damaging federal manufacturers’ sales tax. Without a doubt, the tax on manufacturers has cost the country jobs. For years, that tax was higher on domestically manufactured goods than were federal taxes on imports coming into Canada. Worse than hobbling our own manufacturers at home, it also disadvantaged them abroad.

Blenkarn maintains that the new goods and services tax “will make the economy grow by $9 billion.” He added: “The current tax discourages manufacturing and drives deals out of the economy. Canadian exporters will benefit because they will be exempt from the tax on any goods or services that are exported. Right now, their cost of buying office equipment, sales equipment, vehicles and production equipment includes the manufacturing tax. They either eat the cost or pass it along when they export, which makes them less competitive.”

Not surprisingly, the Canadian Manufacturers’ Association endorses the new tax and maintains that a shift to sales or consumption taxes and away from income taxes is beneficial. Last year, Ottawa collected only 21 per cent of its revenue from sales and excise taxes and most of the rest by taxing incomes, both individual and corporate. The association observed that economies which derive a higher proportion of revenues from sales taxes grow considerably faster than those with high income taxes. The reason for this is self-evident. High income taxes sap personal incentive, encourage cheating and force companies to set up operations in tax havens.

Of course, Canadians shouldn’t count on tax cuts before they are announced. There is always a danger that, in a country as easily taxed as this one, Wilson’s new goods and services tax will allow spendthrift politicians to order nuclear submarines or indulge in other fiscal frills. But, for a variety of reasons, I am convinced that this cabinet will cut taxes, so that, once again, Canadians will be peacefully parted from their money and will get it back again from politicians buying votes.