Value-Added Taxation in Canada: GST, HST, and QST (5th edition), Ryan global tax services, publ. by Wolters Kluwer, 12/2015

Value-Added Taxation in Canada is an in-depth analysis of the Goods and Services Tax (GST), its harmonized counterpart (HST) currently applicable in Nova Scotia, New Brunswick, Newfoundland and Labrador, Ontario, and Prince Edward Island, and the Quebec Sales Tax (QST). The book combines discussion on the theoretical and practical questions posed by Canada’s value-added taxes, with an emphasis on the implications for private and public sector taxpayers. The authors have integrated commentary on the impact of all three taxes (GST, HST, and QST) in each topical area. These taxes are referenced extensively throughout the book, providing insight into the legislation and administrative policy at both the federal and provincial level.

This fifth edition of this essential reference has been updated to reflect applicable legislation, regulations, government policies, and proposed amendments as of September 2015.

Gale, William G. & Benjamin H. Harris, “A Value-Added Tax for the United States: Part of the Solution,” Brookings Institution and Tax Policy Center, 07/2010

“The IMF (2010) estimates that, in advanced economies, an increase of 10 percentage points in the initial debt/GDP ratio reduces future GDP growth rates by 0.15 percentage points. Hence, the projected increase in the debt/GDP ratio from about 40 percent earlier in the decade to 90 percent by 2020 (Auerbach and Gale 2010) would be expected to reduce the growth rate by a whopping 0.75 percentage points. By cutting deficits, the VAT would help spur economic growth.”      (Pg. 5)

“Concerns about the regressivity of the VAT are complex, but they should not obstruct the creation of a VAT for two reasons.  First, while we accept the validity of distributional considerations, what matters is the progressivity of the overall tax and transfer system, not the distribution of any individual component of that system. Clearly, the VAT can be one component of a progressive system.

Second, it is straightforward to introduce policies that can offset the impact of the VAT on low-income households. The most efficient way to do this is simply to provide households either refundable income tax credits or outright payments. For example, if the VAT rate were 10 percent, a $3,000 demogrant would equal VAT paid on the first $30,000 of a household’s consumption. Households that spent exactly $30,000 on consumption would pay no net tax. Those that spent less on consumption would receive a net subsidy. Those that spent more on consumption would, on net, pay a 10 percent VAT only on their purchases above $30,000. Toder and Rosenberg (2010) estimate that a VAT coupled with a fixed payment to families is generally progressive, even with respect to current income.
In contrast, many OECD governments and state government offer preferential or zero rates on certain items like health care or food to increase progressivity. This approach is largely ineffective because the products in question are consumed in greater quantities by middle-income and wealthy taxpayers than by low-income households. Furthermore, this approach creates complexity and invites tax avoidance as consumers try to substitute between tax-preferred and fully-taxable goods and policymakers struggle to characterize goods (for example, if clothing were exempt from the VAT, Halloween costumes classified as clothing would be exempt while costumes classified as toys would not).”   (Pg. 7)

“The Canadian VAT.  In 1991, Canada implemented a 7 percent VAT at the national level to replace a tax on sales by manufacturers. Many of the concerns associated with the VAT in the United States can be assuaged by observing the Canadian experience.

Canada addressed distributional concerns by applying a zero rate to certain necessities and adding a refundable tax credit in the income tax. As noted above, we prefer the latter method. The Canadian VAT is completely transparent: it is listed separately on receipts just like sales taxes in the U.S. Perhaps because of the transparency, the VAT has not led to significant growth of government spending. Federal spending in Canada has in fact gradually declined from 22.6 percent of GDP in 1991—when the VAT was implemented—to 14.9 percent in 2009. The standard VAT rate has declined over time to 6 percent in 2006 and 5 percent in 2008. Federal tax revenue in Canada has fallen from 17.6 percent of GDP in 1991 to 16.3 percent of GDP in 2007 (and fell further to 14.6 percent during the 2009 recession). In terms of both revenues and expenditures, the size of the Canadian federal government has shrunk significantly since the introduction of the VAT. Since 1991, Canadian inflation and economic growth rates have been similar to those in the United States.”  (Pg. 11)

“An American VAT.  The structure of an American VAT should include:
- a very broad base;
- rebates or income tax credits (rather than product exemptions) to achieve progressivity;
- efforts to raise transparency (for example, having VAT listed separately on receipts); and
- explicit links to spending discipline.

While we are not wedded to a particular rate, we do note that a 10 percent VAT with a broad base could raise about 2 percent of GDP in revenues, even after netting out the offsetting adjustments in other taxes and the costs of compensating households for VAT payments on a reasonable level of consumption.

Other than the resources used to provide the rebate, VAT revenues should be used largely, if not completely, for deficit reduction. While tax and spending reform require continued attention from policymakers, closing the fiscal gap is a top priority. To the extent that VAT revenues are used for other purposes, there will be fewer options left for balancing the federal budget.
We believe the states would benefit from dropping their sales taxes and rapidly harmonizing with a federal VAT, but that is an issue they can decide for themselves. If all states did harmonize and if the federal VAT rate were 10 percent, the resulting combined VAT rate—including the state and federal rate—would be on the order of 15 to 17 percent. This would still be below the OECD average, but would be sufficient to significantly close the long-term gap and replace and improve upon state-level sales taxes. It would also send a strong signal to consumer that public policymakers are aiming to reduce consumption and raise saving.
Given current economic challenges, the timing of a VAT is important. Instituting a significant tax on consumption during a recession would be counterproductive. The optimal time to implement a VAT is after the economy has returned to full employment.
The VAT is not the only tax or spending policy that can constructively help solve the fiscal problem, nor will it solve the problem by itself. Nevertheless, to oppose the VAT is to argue either (a) there is no fiscal gap, (b) ignoring the fiscal gap is better than imposing a VAT, or (c) there are better ways than the VAT to make policy sustainable. No one disputes the existence of a fiscal gap, though, and the economic costs of fiscal unsustainability are enormous. As to the notion that there are better ways to put fiscal policy on a sustainable path, we would be excited to learn about them. In the meantime, policy makers should not let the hypothetical—and to date undiscovered—ideal policy get in the way of the time-tested, more-than-adequate VAT.”   (Pg. 11-12)