Departures from Neutrality in Canada's Goods and Services Tax

27 Pages Posted: 29 Feb 2012

See all articles by Michael Smart

Michael Smart

University of Toronto - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: February 24, 2012


With recent accessions to the federal-provincial Harmonized Sales Tax, provinces with value added taxes (VATs) now comprise over two-thirds of the national economy. While Canadian VATs are economically superior to the taxes they replaced, they are not as well designed as in other countries. An efficient VAT is a uniform tax on all consumer (but not business) purchases. Although the OECD has reported that Canada’s VAT is one of the most efficient in the world, that assessment was based on data shown here to be misleading. In reality, Canada’s VATs have large exemptions, rebates and rate preferences that reduce revenues and hamper productivity. If all these tax preferences were eliminated, government VAT revenues would increase by as much as $39 billion, or more than 50 percent. Moreover, taxing consumer commodities at a single rate reduces opportunities for tax evasion, simplifies tax compliance, and in most cases increases economic productivity. Given the fiscal and productivity challenges currently facing Canadian governments, a new look at VAT design is clearly warranted. This paper offers a detailed assessment of the effects of the tax on the economy, and it proposes a number of specific, feasible reforms to the GST-HST system.

Keywords: tax, GST, value, added, consumption, policy, inefficiency, efficiency, rate, revenue, VAT, HST, Canada, system

JEL Classification: E62, H2, H21, H26, H25, H20, H24

Suggested Citation

Smart, Michael, Departures from Neutrality in Canada's Goods and Services Tax (February 24, 2012). University of Calgary SPP Research Papers, Vol. 5, Issue 5, February 2012, Available at SSRN:

Michael Smart (Contact Author)

University of Toronto - Department of Economics ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679

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