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Is Cutting the GST the Best Approach?

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Disciplines
  • Economics
  • Political Science

Abstract

The government of Canada has reduced the Goods and Services Tax (GST) rate by 2-percentage points over the past several years. This tax measure seems to be welcomed by the public and some public policy observers; however, it is also associated with certain economic and social costs. This paper aims to assess the rightness of the GST reduction. To that end, the paper summarizes research findings regarding economic costs and levels of distortion associated with alternate tax measures. The paper also contrasts Canada’s reliance on consumption taxes with general trends prevailing in other industrialized countries. The analysis shows that taxing consumption is one of the most economically effective methods of generating government revenues, whereas the reduction of consumption taxes yields the least optimal economic pay-off compared to other tax measures. The growing importance of value-added taxation is the clearest tax policy trend in the OECD countries, whereas reducing the GST rate will further diminish the importance of consumption taxes in Canada with no noticeable dollar value savings for households.

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