In Brief: In the lead up to the proposed cut to the GST, a Globe & Mail survey showed that
’s top economists disagreed with the cut. Among the 20 economists surveyed was Canada Ian Munro, AIMSDirector of Research. He argued that the federal government’s giant surplus would be better spent by reducing the source of the surplus – personal income taxes and taxes on business.
The Conservative government’s plan to trim the GST for a second time has been soundly rejected as a top tax-cutting priority by a large group of economists surveyed by The Globe and Mail.
All 20 economists said other tax cuts would be better for the country than trimming another percentage point from the goods and services tax, which represents more than $5-billion in revenue. It’s a remarkable show of unanimity on public policy, given that the responses were from organizations as diverse as the Fraser Institute, the Canadian Auto Workers, Canadian Manufacturers & Exporters, Bank of Montreal and the Halifax-based Atlantic Institute for Market Studies. Most economists said the government’s priorities should be cutting personal income and business taxes, especially the latter.
“There is an overwhelming consensus amongst economic research that business taxes are the most economically damaging taxes and thus should be the federal government’s top priority,” said Niels Veldhuis, director of fiscal studies at the Fraser Institute in Vancouver.
And most said point blank that the government’s proposed GST cut is a bad move, one with a negligible effect on the economic health of the nation that does nothing to boost productivity.
“In the modern, global economy, Canada has to do everything it can to make its workers and companies competitive,” said Don Drummond, chief economist at Toronto-Dominion Bank.
“The federal surpluses have offered a golden opportunity to move forward in a very decisive manner. The GST rate cuts don’t move that agenda forward at all,” Mr. Drummond said.
The Conservative government said last week that it plans to cut a second percentage point from the GST, bringing the sales tax to 5 per cent, after a one-percentage-point cut last year.
Mr. Drummond and others have plenty of ideas about where that $5-billion could go.
Personal and corporate income tax reductions, “if properly structured,” would be one, he said. Another would be reversing the earlier GST tax cut and shaving every Canadian’s marginal personal income tax rate by two percentage points.
All told, 16 of 20 respondents to The Globe’s survey called the government’s announcement to cut the GST a bad move, while two said it was irrelevant and two said it would be good for the economy.
The cut may give a small pop to consumer spending, but that’s hardly an area that needs boosting, given the repeated warnings from the Bank of Canada that the economy is already running above capacity.
“Cutting the GST could encourage more consumption at exactly the wrong time,” said Patricia Croft, chief economist at investment manager Phillips Hager & North. “Domestic demand is already very strong and encouraging additional consumption could make the Bank of Canada’s job tougher at this juncture.”
A one-point GST reduction adds about 0.3 per cent to Canada’s gross domestic product, “but it’s one-time and there are better ways to do it,” said Sherry Cooper, chief economist at BMO Nesbitt Burns.
David Park, chief economist at the Vancouver Board of Trade, went further, calling the proposed reduction “the worst tax to cut in the spectrum of federal taxes,” especially when the Bank of Canada is worried about inflation.
Rather than throwing fat on a sector that’s already on fire, the government should focus on supporting business investment in the face of a soaring dollar, a U.S. slowdown and Canada’s gaping non-resource trade deficit, said CAW economist Jim Stanford, who would focus instead on expanding the Canada Child Tax Benefit.
Ian Munro, director of research at the Atlantic Institute, would also prefer corporate income tax reductions, saying they would provide the greatest stimulus to growth.
Other ideas ranged from cutting the capital gains tax to integrating the GST with provincial sales tax, both of which should encourage investment.