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• W137391339 abstract "The goods and services tax (GST) succeeded in eliminating several major deficiencies of the previous federal sales tax, such as its distortions for exports, imports, investment, and business organization. Experience with the GST has revealed significant deficiencies of its own, such as high complexity, high operational costs, and non-compliance. This article examines the design and characteristics of a scheme to replace the GST with a direct consumption tax (DCT). The requirements for a direct tax that implements a consumption base are considered. The illustrative DCT design is then compared with the GST and other proposals for replacing the GST in respect of their economic, operational, and political economy aspects. The overall assessment of the DCT is that it represents an attractive alternative to the GST. The DCT would reduce or eliminate the major deficiencies of the GST while maintaining or surpassing the gains achieved by the GST. The few drawbacks of the DCT appear to be outweighed by its substantial benefits. The DCT design is based on the equivalence between the base of a broad value-added tax and the sum of a comprehensive payroll tax plus a cash flow tax on business. It also aims to tax most consumption out of savings accumulated prior to the tax change. These considerations lead to a combination of a federal payroll tax (FPT) plus a cash flow tax (CFT) on corporations. The FPT is primarily an employee payroll tax, deducted at source at a flat rate by employers, but it also includes cash flows from unincorporated businesses and source withholding on non-income-tested transfers and pension-type receipts. The CFT applied to corporations would 712 CANADIAN TAX JOURNAL / REVUE FISCALE CANADIENNE (1994), Vol. 42, No. 3 / no 3 be based on adjustments to their income statements to yield cash flows. The FPT would use the existing collection apparatus of the personal income tax, and the CFT would be a supplement to corporate income tax filing. Lower earners would receive full FPT rebates through refundable credits, and the transfer-dependent poor would not be subject to tax. With certain fiscal offsets including an excise hike, a 2.9 percent rate of FPT and CFT would replace the GST’s net revenues. At a very broad level the DCT and GST, both consumption taxes, have similar economic characteristics. However, the DCT is origin-based while the GST is destination-based. The DCT operates on the sources side of households’ budgets, by reducing their labour and business returns, whereas the GST works on the uses side, by raising the level of consumer prices. The analysis finds that the two forms of tax should be very similar in their impacts on exports, imports, investment, and savings. Additionally, work incentives and the demand for labour should not diverge significantly under the two approaches. Design features of the GST that cause distortions between the public and private sectors and among different types of businesses would be eliminated by the DCT. The shift from the GST to the DCT should cause a one-time reduction in consumer prices of about 3.6 percent, but otherwise little macroeconomic impact appears likely. Economic efficiency might be improved by some aspects of the DCT, but the overall ranking with the GST in this respect is uncertain. Shifting from the GST to the DCT would substantially reduce the regressivity of taxes and even introduce some progressivity at lower incomes. Complexities of interpretation and application that arise under the GST would be radically reduced under the DCT. The proposed scheme would build upon tax concepts and collection devices that are already used to operate the personal, corporate, and excise tax systems. The DCT might reduce the GST’s annual administration cost of about $500 million by roughly 70 to 80 percent, for annual savings of about $350 million to $400 million. The DCT might also reduce the GST’s annual compliance costs of about $1 billion to $1.5 billion by roughly 75 to 90 percent, for additional savings on the order of $750 million to $1.35 billion. Compensatory provisions for lower earners under the FPT could be better targeted than under the GST, and consequently they would cost less and provide smaller distortions to work incentives. Compliance should be at least somewhat improved under the DCT, since source withholding would apply for most receipts under its FPT; its much lower tax rate than the GST’s 7 percent should also induce better compliance by businesses. Smuggling should also be alleviated by the DCT, since the tax would be collected at the sources of factor earnings rather than at the border on goods. This should improve the competitive position of Canadian retailers and help to free the border. In assessing the DCT as a replacement for the GST, political economy aspects are also important. The DCT would maintain tax visibility principally through its FPT, and it would achieve this in a manner that eliminated the daily irritations faced by consumers under the GST. Proposals for taxinclusive pricing with the GST, in contrast, would reduce the tax visibility that is vital for governmental accountability. The added proposal for GST harmonization with the provincial sales taxes would further reduce tax ASSESSING A DIRECT CONSUMPTION TAX TO REPLACE THE GST 713 (1994), Vol. 42, No. 3 / n 3 visibility. Although the DCT is not harmonized with the provincial taxes, it would fully eliminate the GST, the indirect tax that is the more cumbersome and costly to operate. The DCT instead harmonizes its components with existing features of other major federal taxes. Revenues from the DCT could be earmarked for the provinces in place of existing federal transfers, perhaps under the label of a national health and education levy. Replacing the GST with a DCT would bring Canada’s tax mix into line with that of our predominant trade partner, the United States, which relies more heavily on payroll taxes but has no national sales tax." @default.
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• W137391339 date "2008-01-01" @default.
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• W137391339 title "Assessing a Direct Consumption Tax To Replace the GST" @default.
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