The GST isn't good because it raises tons of revenue. It's good because it does so at much less cost than higher income or corporate taxes
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James Tobin, Nobel Prize-winning Yale economist and proponent of the “Tobin tax,” a small percentage levy on all international financial transactions he thought would discourage speculation, once ruefully reflected on what it was like to have a tax as one of your principal legacies — with your name on it, to boot.
I doubt Brian Mulroney, when he was starting out in politics, imagined one of his main legacies would be that his government had modernized Canada’s tax system, replacing a creaky, leaky sales tax on manufactured goods with a sleek new tax on all goods and services, levied at a lower rate and with very few exceptions.
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When the late Hugh Segal took over as Mulroney’s chief of staff in 1992, he “sat me down,” Mulroney writes in his memoirs, “for a frank chat one afternoon at Harrington Lake.” Segal told Mulroney one reason his popularity had plummeted was that he was on TV too much. Mulroney’s response: “Do you think it was my first choice to be out front and centre on the GST? That was Finance’s formulation.”
As he tells it, finance minister Michael Wilson came to him in the mid-1980s pitching a grand tax reform in which income tax rates would be brought down, the income tax base would be broadened, and the 60-year-old manufacturers’ sales tax — a special tax on manufactured goods in a country paranoid about its under-sized manufacturing sector — would be replaced by a new European-style value-added tax, among whose clear advantages over the old tax were its lower rate and broader tax base. (Low rates, broad bases: the mantra of good tax policy.)
Mulroney was nothing if not confident but even he thought it would be too much to go to Canadians in the 1988 election trying to sell both a new free trade agreement and a new, more visible sales tax so he asked Wilson to do the income tax reform first and then follow up after the election with the GST, which he did. But reform was on the order sheet. In the famous leaders’ debate in which Mulroney and Liberal leader John Turner traded haymakers on free trade (I happen to believe you’ve sold us out!/You do not have a monopoly on patriotism!) the slugfest eventually abated and the debate moved on to a discussion of the next subject up: a new national sales tax, not yet referred to as the GST. (The PMO was still working on a French name for it, Mulroney recalls, after a first try produced initials that also stood for socially-transmitted disease.)
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Unlike the Tobin Tax, the GST never did carry Mulroney’s name. But Mulroney wore it and so did Kim Campbell, his successor as Progressive Conservative leader, who went on to lose all but two of the party’s 154 seats in the House of Commons, including her own.
In his memoirs, published in 2007, Mulroney is almost gleeful that after the Chrétien Liberals took over in 1993 they kept the GST (a decision that eventually forced deputy prime minister Sheila Copps, who had promised to quit if they didn’t do away with it, to resign her seat and win it back in a byelection — a self-indulgent waste of money.)
“I suppose he who laughs last laughs best,” Mulroney writes. When the Harper government reduced the GST rate from seven to five per cent, “The people who originally opposed the GST for purely political reasons were now demanding that other taxes be reduced instead.”
When the subject comes up of why the GST stuck, the usual argument is that it generates too much revenue for spendthrift politicians to remove it. Last fall’s fiscal update has it bringing in $53.4 billion next fiscal year — 11 per cent of federal revenue. Politicians’ avarice is certainly at play. But the crucial economic argument is that raising that kind of money with higher income or corporate taxes — which could be done — would be much more costly to the economy. Top income tax rates would have to rise well above 50 per cent. Corporate taxes would have to rise by at least two-thirds to replace the GST. The carbon tax, supposedly a “tax on everything,” is only scheduled to bring in $12.9 billon next year, just a quarter of what the GST does.
The GST really is a tax on everything (or almost everything, as the number of exemptions is rising) and that’s what’s good about it. Landing as widely as it does, it can be low. Lots of people claim taxes don’t really matter when they’re making choices. A five per cent tax on just about everything probably doesn’t matter that much. A 60 or 70 per cent tax on the next dollar you earn almost certainly does.
“He who laughs last” is not necessarily the most satisfying reward. Will the many aspiring prime ministers attending Mulroney’s funeral this weekend be more impressed by how introducing the right tax for the economy is at the heart of his legacy — or by the memory of the two seats his party was reduced to in 1993’s election, leading to its final dissolution in 2003?
Two seats will probably dominate but if all the would-be PMs could spend just a moment reflecting on why broad-based taxes applied at low rates are best, future Canadians would benefit.
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William Watson: Mulroney’s wisdom on taxes — lower the rate, broaden the base
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20.03.2024
The GST isn't good because it raises tons of revenue. It's good because it does so at much less cost than higher income or corporate taxes
You can save this article by registering for free here. Or sign-in if you have an account.
James Tobin, Nobel Prize-winning Yale economist and proponent of the “Tobin tax,” a small percentage levy on all international financial transactions he thought would discourage speculation, once ruefully reflected on what it was like to have a tax as one of your principal legacies — with your name on it, to boot.
I doubt Brian Mulroney, when he was starting out in politics, imagined one of his main legacies would be that his government had modernized Canada’s tax system, replacing a creaky, leaky sales tax on manufactured goods with a sleek new tax on all goods and services, levied at a lower rate and with very few exceptions.
Subscribe now to read the latest news in your city and across Canada.
Subscribe now to read the latest news in your city and across Canada.
Create an account or sign in to continue with your reading experience.
When the late Hugh Segal took over as Mulroney’s chief of staff in 1992, he “sat me down,” Mulroney writes in his memoirs, “for a frank chat one afternoon at Harrington Lake.” Segal told Mulroney one reason his popularity had plummeted was that he was on TV too much. Mulroney’s response: “Do you think it was my first choice to be out front and centre on the GST? That was Finance’s formulation.”
As he tells it, finance........
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