As Canadians gear up for the holiday season, it’s clear that many are still feeling the effects of the pandemic on their wallets. With rising costs and stagnant wages, families are struggling to make ends meet. That’s why Conservative leader Erin O’Toole’s promise of a GST tax holiday in December is music to our ears.
The Benefits of Sales Tax Cuts
Recent research for the Finances of the Nation project has shown that sales tax cuts can be an effective way to boost consumer spending and stimulate economic growth. In 2006, when Saskatchewan reduced its sales tax rate by two percentage points, businesses passed on the full amount of the tax cut to consumers in the form of lower prices. As a result, retail sales in Saskatchewan rose by five percent compared to other provinces that kept their tax rates constant.
A Modest Proposal
Mr. O’Toole’s GST holiday would be larger than Saskatchewan’s and would likely have an even bigger effect on consumer spending. The fiscal cost of the GST holiday would be modest, with a revenue loss of about $2.5 billion in revenues that would otherwise be collected by the government.
A Longer GST Holiday Would Be Even Better
While Mr. O’Toole’s proposal is a step in the right direction, it’s not enough to generate the right level of stimulus for our economy. A longer GST holiday of at least three months would create a real incentive to spend more and not just move planned spending from other months into December.
The Conservative Proposal Should Be Extended
Moreover, the Conservative tax holiday would apply only to spending ‘in retail stores,’ which excludes spending on accommodations, travel, and other services. This narrow focus is too restrictive and doesn’t take advantage of the full potential of a GST holiday. To make it more effective, the GST holiday should apply to all taxable purchases other than newly built homes.
A GST Holiday That Would Put Us on the Right Track
Mr. O’Toole says he wants to be the ‘man with the plan’ to secure the recovery. His GST holiday would put us on the right track, so let’s go a little further in that direction than he has proposed so far.
Conclusion
The economy is below its potential, and all spending is good for the recovery. A longer GST holiday that applies to all taxable purchases other than newly built homes would be a more effective way to stimulate economic growth and help families who are struggling to make ends meet. So let’s not be stingy this Christmas season – let’s give Canadians a real reason to celebrate by extending the GST holiday for at least three months.
About the Author
Michael Smart is an economics professor at the University of Toronto and co-director of Finances of the Nation.
