Canada Tackles Its Deficit
WALLER, HAROLD M.
MULRONEY'S GAMBLE Canada Tackles Its Deficit BY HAROLD M.WALLER Montreal Americans who complain about taxes might do well to look north of the border for a hint of things to come. Although...
...The problem is that despite a relatively healthy economy, the country has been unable to generate the revenue necessary to pay the high cost of a welfare state...
...In theory, the final consumer would be the one who pays the tab...
...Their own figuring made them suspicious of the short-term savings that are supposed to result from the elimination of the MST, and politicians began to feel the heat...
...Wilson concedes that he anticipates a one-time price hike of about2.25 percent—not an amount to be dismissed lightly, and it could easily be an understatement...
...states over the past decade...
...Resentment has built, too, over the claim of revenue neutrality, which has proved fallacious...
...Consumer groups also fear the new tax will be inflationary...
...Although families could end up spending thousands of dollars annually in GST, Wilson claims that the aftertax income of Canadians would drop by at most 1 percent...
...Of course, should the new tax turn out to be the cash machine that proponents hope it will be, Mulroney might then be able to reduce the deficit or income tax or both—a stylish way to kick of f any election campaign...
...There have been no movements here comparable to those that succeeded in capping property taxes in variousU.S...
...The government has not specified how long the rate would remain at 9 per cent...
...Despite the widespread complaints that greeted politicians home for their summer break, the Prime Minister remains steadfastly committed to the new tax...
...Canadians in the highest bracket (reached at a taxable income of $55,000) already pay at a marginal rate of about 50 per cent, down substantially from several years ago, but still a pretty hefty burden...
...Some consumer advocates maintain that the exemption of food would benefit the rich, and therefore are willing to make the trade for the lower overall rate...
...deficit...
...Inacountry whose economy is only one-tenth the size of America's, that is proportionally almost twice the size of the U.S...
...Mulroney's task has been simplified by the fact that the two opposition parties are led by lame ducks...
...Thus the government even claimed the changeover to a tax on goods and services would be revenue neutral—that is, the new tax would raise the same amount of money as the old one, but in an economically more beneficial way...
...The present skepticism and outright dissent among taxpayers is unusual for Canada...
...Given how closely Canadian public policy emulates European practice, it is not surprising that last spring Ottawa planners fixed upon a device widely used in Europe, the value-added tax, as the solution to their revenue problems...
...This time, however, the Mulroney administration might face a tax revolt of sorts that cannot simply be shrugged off: Elections have to be held less than two years after the expected inauguration of the tax, just about the point when voters will begin feeling its effect...
...From medical care to family allowances, welfare to old-age pensions, unemployment insurance to public education, Canada's Federal and provincial governments have become a source of support for nearly every citizen...
...it currently stands at 13.5 per cent, up 1.5 per cent this year...
...Interestingly, the Consumers Association of Canada is among those calling for the GST to include food, because it seeks a reduction of the rate to 5 per cent...
...This will probably make it easier for the tax to survive without major modifications...
...Prime Minister Brian Mulroney has been reluctant to raise the income tax again...
...The tradeoff argument sounded reasonable enough...
...Under the Parliamentary system taxes are generally proposed in a budget, invariably passed as a matter of party discipline, and dutifully paid by compliant citizens...
...Canadians would no longer pay the hidden MST on manufactured goods, so they would find those items less expensive (assuming wholesalers and retailers did not neglect to pass on the entire tax savings to consumers), while under the GST they would pay more for all sorts of goods and services...
...He has urged workers to moderate their wage demands and businessmen to pass along the savings from the MST, but he can hardly guarantee they will comply...
...The Canadian Chamber of Commerce, for example, advocates taxing food and drugs, thereby broadening the base andlowering the rate, perhaps to 6 per cent...
...Over the past five years, Finance Minister Michael Wilson has been unable to appreciably reduce a budget deficit of roughly $28 billion...
...Nor is there any real willingness on the part of the ruling Progressive Conservatives, for all their brave rhetoric, to significantly decrease spending...
...If they do not, as seems likely, inflation could far exceed his forecast...
...And it would appear that Canadians, who have generally resisted attempts to limit benefits, hold their womb-to-tomb coverage in the highest esteem...
...Moreover, everyone knows only too well that, once in place, taxes can easily be increased...
...It is certainly not for lack of trying...
...The new 9 per cent tax is to cover such diverse items as haircuts, professional fees, energy, restaurant meals, hotel rooms, funerals, and practically all consumer products...
...In any event, he would have great difficulty retreating at this stage...
...For if a party holding as comfortable a Parliamentary majority as his does could not carry out its announced policies, its right to control the reins of government would be seriously open to question...
...These groups further warn that complications will arise if the Federal and provincial sales taxes are collected separately and on different bases, want exclusions to be simplified for large retailers with diverse inventories, and believe the tax should be visible...
...The Business Council on National Issues (representing large corporations) and the Canadian Federation of Independent Business (representing small firms) are similarly lobbying for reduced rates...
...Harold M. Waller, who writes frequently for the NL on Canadian affairs, is chairman of the Department of Political Science at McGill University...
...He predicts that families with incomes below $30,000 would in fact come out ahead, thanks to credits that would ameliorate the burden somewhat for lower-income groups...
...Indeed, taxation has been a singularly uneventful part of Canadian political life...
...Since taking the helm in 1984, Mulroney has nonetheless had to raise the MST steadily...
...Especially at the middle-income levels, taxpayers are concerned that they stand to lose heavily...
...Although in many respects Canada lags 10-20 years behind the United States, its social programs are far more advanced than those of its neighbor...
...As details of the plan became clearer over the course of the summer, Canadians started to doubt the Finance Minister's calculations and worry about the impact of thenewtaxon their lives...
...In recent years governments have deindexed tax brackets, imposed surtaxes on income tax, hiked both the Manufacturers' Sales Tax (MST) and the unemployment insurance tax, eliminated lucrative income tax breaks, taxed telecommunications, and even "clawed back" money already paid in family allowances and old-age pensions to people with above average incomes...
...Even the organizations that welcome the GST have been warning that it has been set too high and allows too many exemptions...
...The Mulroney government is at present in the process of drawing up the requisite legislation for the levy, called the Goods and Services Tax (GST) here...
...Actually, the GST was originally conceived not chiefly as a means of battling the deficit but as a replacement for the MST, long criticized by government spokesmen, economists and many businessmen as obsolete and a drag on the economy because it effectively favors imports and inhibits exports...
...This persistent effort has been to little avail...
...It is scheduled to go into effect January 1, 1991...
...It turns out that the amount of money the GST is really designed to collect (approximately $24 million) is $6 million more than the " discredited" MST will raise at its latest stepped-up rate...
...The main exemptions are to be groceries, medical services, prescription drugs, resale homes, and residentialrents...
...Yet with prices a little lower here and a Utile higher there, the official reasoning went, in the end everything would cancel out...
...The tax would apply at every level of production, but companies could obtain credits for taxes paid on business inputs...
...Once the GST is in force, though, and consumers see what it is really costing them, the Prime Minister could find himself in deep trouble as he confronts his next test at the ballot box—particularly if it does not at least in the short term significantly increase net government revenues...
Vol. 72 • October 1989 • No. 15
