Could you ever be convinced to accept a sales tax?
That’s the question posed at a forum I was asked to participate in this week hosted by the Alberta Teachers Association. Representing the “Con” side: CFIB’s Amber Ruddy and political strategist Stephen Carter, two policy wonks I often find myself agreeing with. On the “Pro” side: me and Joel French from Public Interest Alberta, a group I seldom agree with. While I am writing this before I hear all their arguments for and against, I will tell you the points I am planning to make to see if I can convince you.
Economists are almost universal in their support for shifting the burden of tax away from income and savings and toward consumption. It is a truism that if you want more of something you tax it less. So if you want to encourage more individuals to invest, which will ultimately grow the economy which will ultimately generate more tax revenue, the high rates of tax we charge on income and the distorting taxes we charge on various forms of investment income (interest, dividends, capital gains) just don’t make economic sense. Sales tax is also a more stable form of revenue from year to year. It is also less cumbersome to administer from a tax collection perspective. Plus, with targeted rebates it is possible to shield low-income workers from paying a disproportionately high share of the tax.
So the economic arguments are sound, but selling it is a political stinkbomb.
Taxpayers hate certain types of taxes and Albertans particularly loathe the GST. So let me try making the political sales pitch for adopting one.
First, the proposal for a sales tax would have to be put to a referendum. That is the law in Alberta, passed by Ralph Klein. Any politician that would dare to impose a sales tax without a referendum would be guaranteed to be turfed out in the following election.
Second, the sales tax would have to be revenue neutral the year it is introduced. Over time as the population, the economy and spending grows, the tax would generate more revenue.
Third, everyone would have to see an immediate benefit from the switch. This objective may sound like it is at odds with the notion of revenue neutrality, but it isn’t. As a 2013 analysis from the School of Public Policy shows, it is possible to make every taxpayer better off without reducing government revenues the year it is introduced. That’s because the tax would generate some $800 million from out of province visitors and we would qualify for a one-time $1.3 billion transition allowance from the federal government if we harmonize with the GST, so there is a $2 billion cushion to play with.
The essence of the Policy School’s proposal is to implement an 8 per cent provincial sales tax (13 per cent when combined with the GST) and eliminate income tax for 70 per cent of Alberta households by massively raising the basic personal exemption to about $60K. This would still leave room to reduce the personal and corporate income tax by at least one per cent across the board. The bottom line is every taxpayer would see a net increase in after-tax real income, the income tax would be made more progressive by virtue of the extremely high personal exemption, and we’d be setting the economy up with a structure that is designed for growth.
So how about it, are you with me on a supporting a sales tax: Yes or no? Let me know.
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