Additional_reading_1103 - NEWS AND ANALYSIS ECONOMIC...

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ECONOMIC ANALYSIS VAT Lessons From Canada By Martin A. Sullivan — Newsflash: It is possible in the real world to enact a value added tax that will modernize an aging tax system, promote competitiveness, and reduce a spiraling budget deficit — without unduly burden- ing low-income families or creating a stealthy ‘‘money machine’’ that finances big government. Make no mistake: A VAT would be immensely unpopular with almost every segment of the public. But responsible liberals and conservatives (that is, those running the government) can support a VAT once they finally realize the alternatives are worse. Canada’s experience might be a preview of VAT possibilities in the United States. Our neighbor to the north has a European-style VAT, officially known as a general sales tax (GST). Unofficially, it is called the ‘‘go south tax’’ or the ‘‘gouge-and-screw tax.’’ The federal tax rate is 5 percent. Provinces with more than four-fifths of Canada’s population have — or will soon have — their own VATs that piggyback on the federal GST. Provincial rates are currently between 7 and 8 percent. To reduce the burden on low-income families, there are refund- able tax credits as well as exemptions for necessi- ties. Canada’s experience might be a preview of VAT possibilities in the United States. The Canadian story has four parts: (1) Conservatives introduced the VAT . In September 1984 Brian Mulroney united Canada’s fractious conservatives and gave them their first general election victory in 13 years. It was the largest parliamentary majority in Canadian history. A pri- ority for the new prime minister was to repair Canada’s relationship with the United States. Six months after the election, he was singing ‘‘When Irish Eyes Are Smiling’’ with Ronald Reagan on a Quebec City stage. Mulroney shared the Gipper’s views on national security and free trade, and the two became fast friends. Running on his record of support for the North American Free Trade Agree- ment, in 1988 Mulroney led conservatives to their first national reelection victory in a century. Concerned about industry’s competitiveness and an unyielding budget deficit, Mulroney proposed a 9 percent VAT on goods and services in 1989. The tax would replace the clunky old 13.5 percent tax imposed on sales by manufacturers. The Mulroney proposal sparked instant controversy and met a tidal wave of public opposition. But with party discipline unlike that in the United States, Mulroney got approval in the House of Commons. (The one dissenting conservative was thrown out of the party.) Passage in the liberal-dominated Senate was secured only after Mulroney used an obscure constitutional provision that allowed him to ap- point eight senators on a temporary basis. The 7 percent VAT finally passed after a two-month fili- buster by Liberals. It went into effect on January 1, 1991. Contributing to the Canadian VAT’s unpopular-
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Additional_reading_1103 - NEWS AND ANALYSIS ECONOMIC...

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