End GST exemptions on food, says paper

Produce is seen in a Breakeyville, Que., grocery store. THE CANADIAN PRESS/Jacques Boissinot

OTTAWA - Two of Canada's leading economists want Ottawa to reopen one of the hottest issues of the last two decades by expanding the GST to include food.

The two economists — Michael Smart of the University of Toronto and Jack Mintz, head of the School of Public Policy at the University of Calgary — say the way Canadian governments collect sales taxes is among the most inefficient in the advanced world.

By eliminating the set-asides such as medicines, books, financial services and especially food, governments could reap an additional $39 billion in revenue annually — about 60 per cent higher than current levels.

That cash bonanza could be used to cut income taxes, fund social services, or both, or even to cut almost in half the 12-to 15 per cent Canadians pay in harmonized sales taxes in most provinces,

"In reality, Canada's VAT (value-added tax) is riddled with exemptions, rebates and reduced ratings that seriously damage its effectiveness," Smart writes in an update of a paper he delivered to a conference in Calgary last fall.

The report was commissioned by the public policy school and is being released at an Ottawa news conference Friday.

"This paper makes the case for an ideal VAT. Taxing consumer commodities at a single rate reduces opportunities for tax evasion, keeps revenues steady and drastically simplifies compliances for businesses."

The economists have no illusions of the difficulty of the task since the GST is such a widely hated tax.

Former prime minister Brian Mulroney so feared a public backlash when introducing the GST 21 years ago that he backed off on a plan to tax food even though it meant a higher level for the levy, at seven per cent.

In the 1993 federal election campaign, former Liberal Primer Minister Jean Chretien promised to repeal the tax and later was assailed by critics when his government never did.

And years later, the Harper government saw political advantage in promising and delivering a two-point cut to the GST to five per cent.

"The problem ... is likely political rather than economic," Smart says.

"There is some evidence that taxpayers respond negatively to highly visible sales taxes on day-to-day purchases like groceries, and they may not perceive a link between sales tax base-broadening and enhancement of income tax credits."

To make the connection clear, the paper suggests Ottawa rename the GST tax credit to the "Food Tax Rebate."

The economists say value added taxes, or consumption taxes, are preferable to other forms of taxation, and making Canada's VAT more efficient would help the economy.

The food exemption cost the economy about $1 billion through loss of efficiency and compliance costs, the paper calculates, while Ottawa and co-operating provinces lose out on about $8 billion in revenues.

On food, the economists commend the attempt to shelter lower-income Canadians from being taxed, but say a more efficient way of accomplishing the feat would be to increase the GST tax credit.

By excluding food in general, they say, more affluent Canadians are actually deriving a greater benefit than the poor.

"Rich households also benefit from zero-rating, so that from a social policy objective much of the associated tax expenditure is wasted on the rich," Smart's paper concludes.

Aside from food, other exemptions cited by the paper includes financial services, residential rent, education, non-profits, prescription drugs and medical devices such as glasses , municipal services, and small traders and other businesses. As well, new housing has rebates on values under $350,000.

The Smart paper notes that most advanced countries do not exempt food from their VAT tax, although in many it is hidden.