The Gst Cut and Fiscal Imbalance

29 Pages Posted: 13 Jul 2006

See all articles by Michael Smart

Michael Smart

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

Richard M. Bird

University of Toronto - Joseph L. Rotman School of Management; Georgia State University - Andrew Young School of Public Policy

Date Written: June 2006

Abstract

The federal government is reducing its GST rate from 7% to 5%. We examine a broader reform in which this reduction in federal tax rates and revenues is accompanied by a similar reduction in federal transfers to the provinces. At the same time, the provinces may if they wish increase their own sales tax rates to make up the difference, while some provinces, including Ontario, reform their retail sales taxes to emulate the federal GST more closely. We analyze the likely impacts of such reforms on provincial revenues, tax incidence, and business investment. The result of combining these measures would be (1) a better 'balanced' federation, with less room for 'blame-shifting' between levels of government and consequently greater accountability at all levels, and (2) owing to the removal of the present surprisingly heavy tax on investment imposed by the provincial retail sales taxes an expansion in investment and, over time, in productivity, employment, and perhaps economic growth.

Keywords: Canada, GST, fiscal imbalance, retail sales tax

JEL Classification: H25, H77

Suggested Citation

Smart, Michael and Bird, Richard Miller, The Gst Cut and Fiscal Imbalance (June 2006). Available at SSRN: https://ssrn.com/abstract=913962 or http://dx.doi.org/10.2139/ssrn.913962

Michael Smart (Contact Author)

University of Toronto - Department of Economics ( email )

150 St. George Street
Institute for Policy Analysis
Toronto, Ontario M5S 3G7
Canada
416-978-5119 (Phone)
416-978-6713 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Richard Miller Bird

University of Toronto - Joseph L. Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
905-274-8841 (Phone)

Georgia State University - Andrew Young School of Public Policy

International Studies Program
Atlanta, GA 30303-3083
United States

HOME PAGE: http://www.aysps.gsu.edu

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