Paul Wells offers some very persuasive insight into why Stephen Harper cut the GST:
It's not always true, after all, that long-term change and electoral
expediency are necessarily antagonistic. The GST cut is a case in
point. Economists, or at least economists who aren't named Stephen
Harper, hate it. As a mechanism for encouraging growth and
competitiveness, cuts to consumption taxes are widely reckoned to be
the least efficient policy tool. Roger Martin is the dean of the
University of Toronto's blue-chip Rotman School of Management and
chairman of Ontario's Institute for Competitiveness and Prosperity.
"Cutting the GST," Martin has said, "was a terrible idea. Terrible in
every respect."
Well, all but three, from Harper's perspective.
First, it won the Conservatives a lot of votes. Second, the opposition
parties are terrified at the thought of reversing it, which means it's
probably permanent. Third, and most important, it gets a lot of money
out of Ottawa — perhaps $30 billion over the next five years.
The economist's argument is that if you want to finance government spending, consumption taxes are the best way to go. But I guess if you don't want the government to do any spending in the first place, the point is somewhat moot.
What's especially discouraging is this part:
the opposition parties are terrified at the thought of reversing it
It's going to be hard to implement the game plan for social democracy if you're afraid to step on the field.
Worthwhile Canadian Initiative 
The Greens have advocated a one-point increase in the GST, with the funds to go to municipalities for infrastructure. So at least Elizabeth May has put forward a tax increase at a time when it would seem no other party wants to go there.
That said, why they make such a big deal of carbon tax shifting, then raise the GST, I do not understand, especially since the c-tax finances cuts in EI and CPP premiums a bogus elimination of tax for under $20K rather than some low-income credit (as in BC’s use of the GST credit system for their low income credit). In fact, I don’t think the Greens talk about raising the GST credit as they increase the GST, so overall there may be some dubious tax incidence impacts when all is said and done.
You forgot the main point. It dampened inflation numbers that elsewhere in the world are spiking, allowing the Bank of Canada to keep interest rates lower and more money flowing in Canada.
So, Harper foresaw the slowing economy in 2006 when he promised the cuts?
Anyway Stephen, isn’t the carbon tax a reasonable proxy for a consumption tax?
I suppose it is, but OTOH, there’s that whole revenue-neutrality thingy. To the extent that the carbon tax is supposed to bring in revenues roughly equal to those lost to the GST cut, the Liberals could have simply said “We’re reversing the cuts, and dealing with greenhouse gases at the same time.” Part of the money could be used to counter the regressive effects (as their plan already does), but the rest of it could be put to use elsewhere.
I agree that reducing the GST is politically savvy and econamically tragic. That said, I am curious what y’all said when PN Mulroney created the GST. I would bet there wasn’t a positive comment to be found. If I am correct, then I call y’all hypocrites. Feel free to debunk. I am often wrong.
hehehe econamically? Sheesh! I gotta get me a spell cheker! Tragic indeed…
Wow, I gotta get off the sauce. My spelling/grammar/grasp of the english language is pathetic! In the spirit of NASCAR: We is in this together!
Just in case there are some more academically inclined economists reading this blog, there is a good paper on the merits of income versus consumption taxes in a recent edition of the JPE (Nishiyama and Smetters (2005), “Consumption Taxes and Economic Efficiency with Idiosyncratic Wage Shocks” v. 113 n. 5). It argues that an income tax is actually better than a consumption tax (GST) if wages fluctuate and are uninsurable.
So, it’s too much of an exaggeration for people to always be saying that cutting the GST is “bad economics” or “no economist except Harper” would agree… let’s try to stay more objective.
Rick:
I agree that reducing the GST is politically savvy and econamically tragic. That said, I am curious what y’all said when PN Mulroney created the GST.
It replaced the Manufacturers Sales Tax, which somehow had a habit of getting hiked in nearly every Federal Budget. IIRC it was at 13.5% when it was replaced with the GST.
I always found it to be somewhat of a puzzler than Harper cut the GST instead of cutting other taxes. Not that I like taxes (!), but the GST is the closest thing to a “good tax” that I’ve ever seen. Guess I better go now and read that article that Trevor suggested…
It’s a tax cut. That is a good thing. Money out of the hands of the inefficient government sector and into the hands of far more efficient individuals. Relative to other possible tax cuts is it the most efficient? No. Big deal. How about criticizing the enormous number of other wasteful things the gov’t does with your money?
In absolute terms this is more efficient than letting the government have the money so where is the problem? If you win a lottery for $100K are you going to be upset that you could have won $110K? Unbelievable bunch of whiners in this country.