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Sales tax vs Income Tax
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by: Rob on Dec 01, 2005

Here is another one for the budding economicists among the readers.

Here is what we are discussing: Harper has promised to cut the GST, which, of course, is a sales tax on almost all goods and services sold in Canada.

Liberals claim that cutting the GST favours the rich, and cutting personal income taxes instead will help the lower and middle income brackets.

Paul Martin:
"I believe we should cut personal income taxes,"
"I believe mine is more fair, especially for the Canadian middle class."

Ralph Goodale:
"Reducing the GST favours the rich,"
He said lowering consumption taxes such as the GST is good for people who spend a lot of money.
"The biggest savings will go to the biggest spenders,"
** (Rob's note: Is Ralph saying that cutting ANY tax favours the rich, because the rich pay more taxes?)
"Trimming personal income taxes is the way to help people in the lower- and middle-income brackets,"

Argument #1: Cutting a sales tax helps the rich more than cutting an income tax

I totally don't understand how cutting a sales tax helps the rich more than cutting an income tax. Rich people make more money, don't they? Wouldn't they rather their income tax rate be cut? Rich people care about all taxes, probably dividend or capital gains taxes the most, followed by income tax, followed by property tax and finally sales tax.

Argument #2: Cutting personal income tax helps the lower class more than cutting a sales tax.

I totally don't understand this either. A lot of people in the lower class don't even pay much income tax because they don't earn enough. Wouldn't the lower class pay a very high percentage of their money on items that charge sales tax? Clothes, electricity, haircuts, DVDs, tools, etc.

I can understand someone in the middle class benefitting more from a personal income tax cut than a sales tax cut, but by that same logic, it would benefit the rich even more!

Am I missing something?

Doesn't the Liberal plan to cut personal income tax favour the rich more than the Conservative plan to cut a sales tax?

In the end, the average Joe Schmoe won't understand this either. How could cutting a sales tax, which EVERYONE pays equally, help one group over another?

Ok, budding economicists, either tell me Goodale and Martin has lost it, or explain to me how cutting a personal income tax favours people with lower personal income!

reply by: Peter on Dec 01, 2005

I was just blogging about this:


I think it is where you draw the line for lower and middle classes.

Sure if you make less then $8000 then the GST cut is better, although realisticlly what would you be saving? $30? If you are making $8000 then you are already getting a $200/year GST rebate. A good question is what will Harper do with this rebate?

However, if you draw the line at $30,000 then the income tax break is better. With Martin's 1% lower first bracket you save about $220. In order to save $220 with Harper's GST rebate you would have to spend $22000 on GST taxed items.

Anyone making over $35,000 will save a flat rate of about $270/year (with the income tax cut). So in order for Harper's tax cut to save someone more that person would have to spend over $27,000 on taxable items.

Harper's proposed GST cut is just too small to be better the an income tax cut, for the lower and middle class.

reply by: Rob on Dec 02, 2005

That makes some sense, but wait a minute.

Income tax paid = (Income earned - tax exemption) x tax rate.

So decreasing the tax rate by 1% results in a decrease of tax paid by a factor of (income earned - tax exemption), which is income earned - 8000.

In order for that to be higher than a 1% decrease in sales, tax, that means:

(income earned - tax exemption) > money spent
income earned > money spent + 8000$.

This is an oversimplification because not all money spent is on taxable items, but most of it is. Electricity, phone, cable, clothes, diapers, everything but most foods, really.

Case #1: The Poor
They get no benefit from an income tax cut.

Case #2: The Lower Class
They would have to save or spend 8000/yr on non-taxable items to be ahead with a personal income tax cut. That's not likely.

Case #3: The Middle Class
Now it is more likely that they might break even on a personal income tax, because they are more likely to save money, and therefore reach that 8000/yr mark.

Case #4: The Upper Class
Needless to say, a rich person would save or invest 8000/yr, so they'd definitely prefer an income tax cut.

Does that sound right? A personal income tax cut favours the rich most of all, and the "break even" point would be somewhere in the middle class where they save more, and spend more on non-taxable items (ie. food).

reply by: teddyv on Dec 02, 2005

What I haven't heard in the media (and what I like about the idea) is that GST primarily affects after-tax income.

reply by: Peter on Dec 02, 2005

True Teddy, but only on that post tax that income you spend. It is entirely possible to live your life by buying everything you need online (everything taxable) or on the 'black market' where you end up avoiding the tax all together.

reply by: Peter on Dec 02, 2005

Rob, your case #4 is wrong simply because the income tax break is only on the first bracket. Thus the most anyone can save from it is about $270. Whereas to save more then $270 with the GST cut you would need to spend $28,900 in a year, thus be in the upper class.

However, the others are valid. You have to have a total of $8000 either saved or spent on non-taxed items to make the income tax break better. 8000 looks like a big number, but in reality it isn't. Rent and mortgages are not GSTed. If you pay $667/month rent or more you have that covered already. Probably a bit high for people making less then $35,000 but even at $400/month rent that is only $267/month more you have to spend on non-GST items. Add on groceries and you are getting fairly close to that $8000 limit. A few rec drugs, a trip to the casino, whatever you do for entertainment... a little here or there all adds up.

Once you are in the middle class you've got that $8000 licked. I would assume the lower class too, depending on where you drew the line. Back in my University days when I was making $10,000 a year I probably spend a good $6000 of non GST items.

Granted the poor would find the GST better, but we are talking about a difference of litterally 10s of dollars a year. And not to sound cold and heartless, but they already have newly named programs to help them, such as the energy rebates announced earlier which was far more then $10 or $20.

reply by: Rob on Dec 03, 2005

Pete, I crunched some numbers, are you're absolutely right about one thing: to most Canadians, the GST break is absolute peanuts.

Personally, I spend around 10000$/year on taxable items. (I keep track of all my expenses in an Oracle database). That means a 1% GST cut would save me about 100$.

Of course, the year I bought my house or my car, that GST cut would be more valuable.

However, I make about double the median Canadian income (depending what it is), and a 1% reduction in my tax rate would save me over 800$.

That also means that I would have to earn A LOT less before I'd be better off with the GST cut.

So in summation, I can agree that the income tax cut is better for everyone except those in the lower middle class (and below), and even then we're talking about such a small amount of money it barely matters.

Our conclusions:
Martin was RIGHT: His plan is more fair for the Canadian middle class.
Goodale was DEAD WRONG: GST cuts do NOT favour the rich, they favour the lower middle class and below (and barely). Personal income taxes offer a far more significant savings for the rich.
Trimming personal income taxes is NOT the way help people in the lower-income bracket.

Perhaps the Liberal message should be:
- GST cut is peanuts compared to income tax cut
- GST cut helps the lower class, but not nearly as much as direct government assistance made possible by the payment of the GST by the rich.

reply by: Peter on Dec 03, 2005

Rob, you are still failing to take into consideration that the max one is able to save from the income tax cut is $270 because it only applies to the first bracket.

That also means that I would have to earn A LOT less before I'd be better off with the GST cut.

or you'd have to spend a lot more, for example buying a new house or car.

Because of that Goodale is not dead wrong. The 'rich' who buy a new car each year or two, or for that matter anyone who spends more then $27,000 a year on taxable items benefits more from the GST break then the income tax break. And in most cases those who can afford to and do spend $27,000 a year on taxable items are the upper class.

So those who benefit more from the GST break are the poor, but just by $20 or $30, or the rich who's benefits are only limited to how much they are willing tp spend above $27,000 a year.

reply by: Rob on Dec 03, 2005

Thanks Pete - you've just answered my question. Now their comments make sense.

What I was missing was the "cap".

GST tax cuts do NOT favour the rich more than income tax cuts UNLESS the latter has a cap and the former doesn't.

The "cap" (or lack thereof) is the key, not the method of the tax cut.

So all Goodale would need to make him happy is for Harper to put a cap on the GST cut? For instance, it only applies to the first 100$ of an item?

Anyway, you gave me my answer. As usual, you really had to untwist the words to make sense of it.

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