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Corrected VAT Lessons From Canada

Posted By J.D. Foster, Ph.D. On May 4, 2010 @ 1:39 pm In Economics | Comments Disabled

Marty Sullivan, a frequent commentator on tax policy, has now apparently decided the United States needs a value-added tax (VAT). To advance the cause, he penned a brief column on “VAT Lessons from Canada” [“VAT Lessons From Canada”, Martin A. Sullivan, Tax Notes, May 3, 2010.] However, in trying to portray the Canadian VAT in the best possible light, Sullivan airbrushed a couple of the more relevant facts.

The most important fact for the United States and one stunning by its absence in Sullivan’s piece is that the only reason for a VAT debate today is that federal spending has surged dramatically and is not projected to come down materially in the coming years under President Obama’s policies. The long-run federal budget was already on an unsustainable course due to entitlement spending, and now Obama has managed to put the budget on an unsustainable course even in the short term. The responsible and correct action to take is to bring spending back toward historical levels. The alternative is a massive tax hike. Enter the VAT, escorted by Sullivan & Co.

As Sullivan notes, the federal rate on the Canadian VAT, known as the General Sales Tax (GST), stands at 5 percent while the provincial rates are between 7 and 8 percent. The GST replaced a “clunky old 13.5 percent tax imposed on sales by manufacturers”. The GST is surely a better system than the tax system it replaced. But notice what occurred in Canada — a modern, efficient sales tax replaced a “clunky” old sales tax. Canada did not add a tax. The driving motivation of VAT proponents in the United States is not tax reform, it’s tax addition.

Thus, with one sales tax replacing another it is not too surprising Canadian tax levels remained fairly steady over the years. Even so, the VAT remains a money machine, which is its primary lure for proponents. The Canadians have a combined federal-provincial rate of up to a hefty 13 percent. This approaches what many regard as the maximum operational rate of about 20 or 22 percent. If the VAT is such a money machine, how is it the Canadian government is prevented from raising the rate? Why are they leaving so much tax money on the table?

Sullivan nails this one. Unlike most VATs imposed around the world, Canadians suffered a bout of good governance and made their GST transparent. The tax paid on every purchase and the before-tax price is stated separately on receipts and invoices. Unless they keep their receipts and tally the tax every year, taxpayers still don’t know the total GST they paid every year, but printing the tax on receipts at least is a daily reminder of the government take. This has made the GST very unpopular, and politicians arguing for its reduction very popular.

Another point Sullivan gets almost exactly right is this one. “Make no mistake: A VAT would be immensely unpopular with almost every segment of the public.” The only groups that would like the VAT are Washington’s big spenders, like Obama and friends, and those on whom the benefits of all this spending rains like money from the sky.


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