Yet, as I thought about the Canadian economy and how well it seems to have weathered the global economic downturn, one thing that stuck out in my mind is that the federal government reduced the GST rate just prior to the Great Recession. In 2006, the rate was reduced from 7% to 6% while in 2008 it went down to 5%. Could the reduction in the GST rate have stimulated consumer spending in Canada just enough to help offset some of the effects of the economic downturn? After all, a reduction in the GST can be interpreted as economic stimulus. If spending increases are economic stimulus, so are tax decreases.
I’m afraid I don’t have an answer to that specific question for Canada. However, it should be possible to see if countries with greater reliance on consumption taxation have better growth rates than those that were less reliant. What I did do was quickly collect data from OECD Statistics for the 34 OECD countries on the annual average growth of per capita GDP in US PPP dollars over the period 2007 to 2009, the share of GDP accounted for by taxes on goods and services in 2008 and the share of GDP accounted for by taxes on income and profits in 2008. I then proceeded to plot the tax to GDP shares against the growth rates as shown in Figures 1 and 2 with a linear trend. The results show a positive correlation between growth in per capita GDP and the share of GDP accounted for by consumption taxation and a negative correlation between growth and the share of GDP accounted for by taxes on income and profits. Well, I’m glad I sorted that out. Good night.