Double Blind

There are heavy rumours that the USA will introduce a federal sales tax. It would be political suicide if they did so, but politicians have been rumoured to say there will be income tax reductions in conjunction with the introduction of a sales tax. There was an article that explained that once an excise tax is introduced that it will keep on going up, without a reduction in income taxation.

Canada is the only example on the planet where the sales tax has been reduced – the Harper government decreased the GST from 7% to 5%.

The USA does not currently have a federal sales tax.

What is also interesting is the table in the article is somewhat incorrect – the maximum income tax rate computed for Canada is assuming you live in Ontario – the top federal tax bracket is 29%. Provincially it ranges from 10% (Alberta) to 21% (Nova Scotia).

In the USA, the state income tax rates range from 0% (Washington State, Alaska, Florida, Nevada, South Dakota, Texas, Wyoming) to 11% in Oregon and Hawaii. Oregon, however, has no state sales tax.

If there was a credible way of removing income taxes and shifting it entirely onto excise taxes, I would be in favour of it. For one thing, people would no longer have to file their income tax returns by every April 30th, an act which I consider to be excessively burdensome and costly for the majority of the public. However, eliminating income taxation in exchange for excise taxation has practically been proven to be impossible since politicians would like to collect taxes from both sources.

Another real-life example of a failed attempt to replace income taxation with excise taxation will be BC’s “revenue-neutral carbon tax”. It claims to link carbon taxes to reductions in income taxes, but they are two independent decisions. And the moment that the BC Liberals get un-elected out of office, you can be sure the NDP will be re-allocating the tax into spending decisions, hence completely breaking the “revenue-neutral” aspect of the tax (which was a fiction to begin with).

This is why I am rather happy with the federal government’s decision to reduce the GST from 7% to 5%. While it was criticized by most economist-types for being “inefficient” (because income taxation could have been dropped instead), I can materially state that it has done just a good a job of putting money back in my pocket every time I pay for anything.

For the 2010-2011 fiscal year, the federal government is expected to raise $27.3 billion through the 5% GST. Assuming the level of tax collections maintain the same if you increased the tax (which is a very incorrect assumption) you could eliminate the federal income tax ($117 billion) with a 21.4% GST.

To make this slightly less “draconian”, the “other excise taxes/duties” column is $10.3 billion, and the customs import duties is $3.4 billion. So if you uniformly increased all of them by the same amount, you could eliminate the personal income taxes by increasing those forms of taxation by a factor of 2.85 times, which would imply a federal GST rate of about 14.3%.

It would be a very interesting result in a referendum if the Canadian public were asked “Would you support an increase of the GST, customs import duties and other excise taxes by 2.85 times, in exchange of the elimination of the personal income tax?”.

I, for one, would vote yes.

Note that first-world countries that do not have income taxes are exceedingly rare; the Cayman Islands, for example, charges a 20% import tax on nearly anything brought into the island. They can presumably enforce this by virtue of their geography. I am not sure how much smuggling would increase in the event of an increase in Canadian excise taxation – cross-border shopping will become even more in vogue than it is today if domestic sales taxes increased.

This entry was posted on Thursday, April 15th, 2010 and is filed under Commentary, Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.