IDEAS home Printed from https://ideas.repec.org/a/ctf/journl/v62y2014i1p1-41.html
   My bibliography  Save this article

Challenges in Shifting Canadian Taxation Toward Consumption

Author

Listed:
  • Jonathan Rhys Kesselman

    (Canada Research Chair in Public Finance with the School of Public Policy, Simon Fraser University, Vancouver)

  • Peter S. Spiro

    (Senior Fellow with the Mowat Centre for Policy Innovation, School of Public Policy and Governance, University of Toronto)

Abstract

Tax policy analysts in Canada have widely promoted shifting revenues away from the personal income tax and toward the consumption-based goods and services tax/harmonized sales tax, or shifting the personal tax base further toward consumption. This study challenges the "consensus expert" policy recommendations by critically assessing the theoretical and empirical evidence relating to behaviour in the areas of work effort, saving, investment, economic growth, efficiency, and tax compliance. The study further examines the failure of the consensus view to account adequately for the regressive impacts of the prescribed policy changes. Most of the consensus expert analyses rely heavily on foreign evidence while ignoring the fact that the Canadian direct personal tax is already highly oriented toward a consumption base. Capital incomes that remain subject to the personal tax are concentrated in the highest income groups, and these constitute the largest departure from consumption-tax treatment. Moreover, the consensus expert view often neglects the openness of the Canadian economy and heavy corporate reliance on internal finance--both factors that mute the impact on domestic business investment of any stimulus to personal savings. Scrutiny of the two Canadian empirical studies most cited by these analysts reveals an overstretch from the policy inferences that can properly be drawn. We conclude that the proposed reforms are deficient in their claims of large economic gains via incentives, efficiency, and growth. Most of the asserted economic gains are overstated, controvertible, or non-existent. Careful review of the theoretical and empirical evidence reveals a lack of robustness or vulnerability to key assumptions. Most of the putative economic gains from shifting the tax system further toward consumption diminish or vanish when the reform is constrained to be distribution-neutral. Thus, it is the move toward a more regressive tax system implicit in such reforms rather than moves toward a consumption base per se that generates any such potential gains. Both types of reform would adversely affect the distribution of the tax burden unless accompanied by a steepening of the personal tax rate schedule. This study examines the requisite conditions for making the proposed reforms distribution-neutral as well as revenue-neutral.

Suggested Citation

  • Jonathan Rhys Kesselman & Peter S. Spiro, 2014. "Challenges in Shifting Canadian Taxation Toward Consumption," Canadian Tax Journal, Canadian Tax Foundation, vol. 62(1), pages 1-41.
  • Handle: RePEc:ctf:journl:v:62:y:2014:i:1:p:1-41
    as

    Download full text from publisher

    File URL: https://www.ctf.ca/EN/Publications/CTJ_Contents/2014CTJ1.aspx
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lemelin, André & Savard, Luc, 2022. "What do CGE models have to say about fiscal reform?," Economic Analysis and Policy, Elsevier, vol. 74(C), pages 758-774.
    2. Richard Bird & Michael Smart & Jorge Martinez-Vazquez, 2016. "Taxing Consumption in Canada: Rates, Revenues, and Redistribution," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1605, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    3. Grady, Patrick, 2009. "The Conservative GST Cut Has Catalyzed Sales Tax Harmonization," MPRA Paper 59021, University Library of Munich, Germany.
    4. Alex Laurin, 2017. "Off Target: Assessing the Fairness of Ottawa’s Proposed Tax Reforms for “Passive” Investments in CCPCs," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 493, October.
    5. Raul A. Ponce-Rodriguez & Charles R. Hankla & Jorge Martinez-Vazquez & Eunice Heredia-Ortiz, 2016. "Frozen In Time: Rethinking the Poltical Economy of Decentralization: How Elections and Parties Shape the Provision of Local Public Goods," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1604, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ctf:journl:v:62:y:2014:i:1:p:1-41. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Jim Lyons (email available below). General contact details of provider: https://www.ctf.ca/EN .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.