Who will benefit from the GST cut?

April 6, 2006

Imagine a tax cut that you only get when you buy stuff. The more you spend, the more you get from the tax cut.

Skill testing question: who would benefit more from this tax cut, the poor or the rich?

Well, the rich buy more stuff than the poor. So affluent people will
get more cash from this tax cut then low income people will.

You now understand what is wrong with the Conservatives' plan to cut the GST.

The Conservatives have pledged to focus on five priorities in this
Parliament, one of which is "lowering taxes for working Canadians."
Harper plans to support working Canadians by lowering the GST rate from
7% to 6%.

Since this measures is a tax cut that rewards consumption, we had
our doubts about how beneficial it would be for "working Canadians" so
we crunched the numbers.

We looked at how the Conservative’s tax cuts affect families with
lower incomes (a family income under $40,000) vs. high-income families
(with family income of over $150,000).

As of 2007, it is estimated that 48.6% of Canadian families will
make under $40,000 in family income. This means that a whole lot of
families barely make it above the poverty line. Only 5.4% of Canadian
families are estimated to have household incomes of $150,000 or more.

Which families does the GST cut help? Lower income families will get
an average of about $129. On average, higher income families will get
about $907. This is to be expected: the more your consume, the more
money you save from a cut in sales tax.

This GST tax cut costs a lot of money: we think about $5.3 billion
in 2007. Consider the portion of GST cut which will benefit families.
Lower income families will get about 23% of the benefits that flow to
families – and remember they are almost half of all Canadian families.
The relatively small group of highest income families get 18.3 % of the
benefits.

This is a tax cut which disproportionately favours high-income
families. For every dollar of this tax cut received by low-income
families, over 3 dollars goes to families that are not low-income.

If the Conservatives really wanted to help low-income families, the
GST cut would be a silly way to do it. We already have a mechanism to
deal with the GST’s impact on low-income people: the GST credit. At a
fraction of the cost of a cut in the GST rate, enhancing the GST credit
could target low-income people much more effectively.

Over five
years, the Canadian government is going to hemorrhage money paying for
the GST cut. The Conservatives estimate it will cost $32.3 billion over
five years. We (and Don Drummond of the TD bank) think that the GST cut
will cost much more.

Expensive tax cuts like this are exactly why there are so many
spending cuts lurking in the fineprint of the Conservative electoral
platform. We do know they will cut the national child care program and
the climate change fund, but at least another $22.5 billion of cuts is
yet to be disclosed.

The Conservatives are hoping that we will be so mesmerized with our
GST cut that we won't ask what will be sacrificed to pay for it. And
this is the real travesty for low-income Canadians—the small amount of
money they will save in GST will be dwarfed by what they lose as child
care and other public services bear the brunt of the profligate GST
cut.

Sheila Block is Director of Health
and Nursing Policy with the Registered Nurses' Association of Ontario
and a CCPA Research Associate. Ellen Russell is the CCPA's Senior
Research Economist.

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