A GST fiscal stimulus

There are a number of fiscal stimulus proposals out there, but none of them incorporate my suggestion for using the GST to promote an explicitly short-term stimulus and to ensure that the government's ability to pay for future spending is not permanently compromised. For those of you who have not been paying close attention [Cries of "Shame! Shame!" from the enthusiastic crowd], here is the proposal:

• Reduce the GST to 3% as of yesterday.
• Increase the GST to 7% on January 1, 2010.

And here's why it's such a good idea that I'm willing to put on a tie [Gasps from the crowd] and go on national TV and explain it - in either official language:

1. It provides explicitly temporary tax relief.
2. It promotes consumption expenditures.
3. The prospect of an increase to 7% will accelerate people's spending plans, just when we need it. Let's make intertemporal substitution work for us.
4. It corrects the horrible policy blunder of cutting the GST in the first place.

Comments

[Andrew F]

All good points, but you've forgotten the most important obstacle: politics. Harper literally can't implement this policy, not after making such an issue about it in this past campaign. He would, to use the cliche, be hoisted by his own petard.

Great idea though! Too bad all we can do is sigh in disappointment that it almost certainly won't be implemented.

[Adam]

Alternatively, eliminate the GST completely.

[Nick Rowe]

Let me help you re-frame point 4 (because you don't have any hope in hell of selling your proposal politically if you frame it that way!):

4'. Cutting the GST temporarily was a wise move (though slightly premature) that helped postpone a recession in Canada, but it is now time to announce explicitly that the past GST cuts were always intended to be temporary, and should of course be reversed when the crisis is past, as it will be soon.

[Stephen Gordon]

That could work - if I could manage to get through the whole sentence without snickering.

[Dee]

Don't know if middle income earners will rush out to save 4% on big ticket items before 7% kicks in especially if they don't know whether they'll have jobs or not. And remember the rule, no tax should be temporary just look at what the Bush 'temporary now permanent' tax cut has done for Americans. Nothing.

Just hope whatever is decided about the tax cuts, it doesn't push things down to property owners like in some parts of the U.K. and U.S. In some cities property owners have found it more economical to tear down a building and pay tax on the empty lot than wait for a recovery in the housing market.

Should have left the 7% GST alone. They've gone back on a few of their promises, the GST should have been one of them. Germans are right, it is crass Keynesian.

[Declan]

Well, I appreciate you trying to bring some sense to the issue. Certainly better than going out and getting yourself chopped up by a windmill. :)

Still, it's kind of sad that we all immediately see how suicidal it would be politically to do the right thing for the country.

[Declan]

Also, I assume you realize that the second most likely outcome from promoting this idea (After 'nothing' in the #1 spot) is that the tax is temporarily reduced to 3% and then stays there because nobody wants to increase it - right?

[Patrick]

Are you in the camp that holds that consumption taxes are Pareto superior to income taxes? To me, the claim is a more than a little counterintuitive. But, I'm not an economist, and Weisbach's paper is way beyond me, so I try to keep an open mind ...

In any case, assuming consumption taxes are preferable to income taxes, then maybe it makes sense to throw in an big income tax cut today, and jack-up the GST even more to re-balance the budget starting in 2010.

[brendon]

Well Stephen, I am somewhat guilty. I had the opportunity to submit ideas for a stimulus package and had included your GST idea in the first draft - but then scrapped it thinking that there was no way it would ever be implemented. My sincerest apologies, I still think its a good idea.

[Stephen Gordon]

Also, I assume you realize that the second most likely outcome from promoting this idea (After 'nothing' in the #1 spot) is that the tax is temporarily reduced to 3% and then stays there because nobody wants to increase it - right?

Oh, I have no illusions about the likelihood of it being adopted, or of the even lower likelihood that the second phase would be implemented. I'm pretty sure I won't be wearing a tie anytime soon.

[geoff]

What I'd like to see is the 3% gst, thought since I'm full up with things it will have no effect on my consumption, and then in 2010 crank it up to 10% or 15% with offsetting reductions in personal income taxes to in effect collect only 7%

[Marie-Claude]

Would you even shave your beard???

And I think Mr Rowe had the perfect way of phrasing it.

[ERic]

could "work"? - what is the exact problem being sorted here? I think and see that there is a massive collection of interdependent effects, few of them ever identified in one sentence, many external to Canada's shoppers (GST domain of effect). Resource industry doesn't care about GST because they are not deciding whether to buy a new truck or drill bit today. The average citizen isn't going to buy a new pair of shoes because GST is down this month. GST sure, change it, but don't threaten everyone by saying that it is the solution.
What is made and designed in Canada that the GST reduction would directly help?

Here is a another idea, and not one that I am suggesting to be taken alone and independently. There needs to be a whole set of things to help and reduce the detrimental impacts on our structural economy, to increase our global competitiveness. Many things have needed to be going on even before the recent economic peril. I would like to hear that Canada is investing in the future, its future, at the same time as ensuring a heart beat today. Lets get some optimism going so that when is there positive news it generates real confidence. LETS INVEST MASSIVELY IN EDUCATION and provide tax incentives to those with billions of cash to give it to academics and learning. Lets invest in structural capabilities in Canada that keep us from relying on extractive industries for short term cash, and on a car industry that we have no say about. Technology and industry should be made in Canada.

[Dee]

ERic: Don't think a massive investment in education is in the cards with this government. It was disturbing to hear about the cut backs @ ON unis given what the projected unemployment rate will be.

This should give bailout people a shudder or a snicker; snitched from AngryBear:

http://angrybear.blogspot.com/2009/01/more-bailout-money-of-another-huge.html

[KM]

The key to getting things back on track is to a.) keep fear to a minimum, and, b.) get hourly productivity rising as soon as possible.

Now is no time for politicians to even hint at undermining the social safety net, as no stimulus will be effective if people fear that there is no limit to how far their standard of living could fall. Fear (and for good reason in those days) was one of the reasons why the Great Depression was as bad as it was.

Then we come to the p-word: productivity. Eric's suggestions on education are good ones, as education plays an important role in improving a society's productivity levels. Some other good suggestions for improving productivity from the executive director of the Centre for the Study of Living Standards a few years ago:

1. Make a return toward full employment the top priority

2. Encourage Canadian firms to take up new technologies and best practices

3. Foster competitive markets; reduce barriers to competition where possible

4. Reward the movement of labour from low-productivity to high-productivity sectors. Don't subsidize or protect declining industries.

5. Develop the R & D capacity of Canada's universities

6. A real crowd pleaser: Increase the amount of time that Canadian workers get off every year (why do we get two weeks per year when Australians get four and suffer no ill consequences for it?) in order to remove excess hours from the productivity calculations

(Source: http://www.csls.ca/news/presentations/productivity.asp)

[Stephen Gordon]

Would you even shave your beard???

It's not that good an idea...

[Rick]

This is a near-perfect no-win situation. Given the numerous and often contrary suggestions offered by econs and the rest of us, can we expect the policy-makers to make good decisions? If their stimilus offerings have little or no effect, will we assume they made the wrong decisions? To do nothing will certainly be met by jeers from the majority.

Doing nothing may be the best idea never implemented.

[Leigh Caldwell]

The UK's VAT (our version of GST, I believe) has been temporarily cut in exactly this way. Reduced from 17.5% to 15% on December 1 2008, and will be raised back to 17.5% on January 1 2010.

You might be surprised by the lack of support it's had. Before, it was decried with "nobody will buy something just because it's 2% cheaper". Afterwards, it's been "we told you it wouldn't work" - although it's far too soon to measure whether it did work. But then, everyone likes to criticise the government. The main critics are, inevitably, the low-tax party which has managed, with a straight face, to claim that a transfer of £12 billion from government to consumer is "a waste of money".

One possible positive sign is that UK retail sales at Christmas were not as bad as was feared in advance. Naturally, the chance that government policy will get any credit for this is minuscule.

[Mark Dowling]

Here's an idea - instead of a token global cut, zero rate labour-using non-offshorable services for a period of time, such as renovations (help the construction industry) and car servicing (help the auto parts/auto dealership sector). For one thing, zero rating renovations would help those firms compete that actually charge tax and render to CRA GST on renovations as it is.

In similar ways, encourage consumer spending most in sectors where most of the transaction is carried out in Canada.

If we're going to undermine the federal fiscal position, we should have no qualms being selfish about who the beneficiaries are.

[b t g]

frankly, it is not a good idea, for the simple reason that so many of the things people would buy are imported - so it only provides a minor benefit to retailers and distributers and their employees (and even then, if these companies are foreign owned, that money doesn't stay here), while exports have the GST rebated, so it does nothing for export oriented sectors.

a better idea would be to give a holiday on payroll taxes - particularly EI premiums. cut both employer and employee premiums in half for 2 years. this puts more money in consumers pockets, but also, it can help export oriented sectors by helping them to be more competitive. and if a company is profitable, well, some of the reduction comes back in taxes anyway.

Better yet, permanently cut EI premiums and have the premiums only high enough to fund the payments people receive - any training or other monies spent to help workers should come from general revenues, funded by an eventual 1% increase in the gst.

frankly, i doubt that tax cuts of any kind will make much difference

[Erin Weir]

Check out “Make the GST cut temporary” on page 25 (26 of 151 in the PDF) of today’s Alternative Federal Budget.

[Nick Rowe]

"This year’s AFB would:
• reinstate a 6% GST rate effective July 1, 2011."
Wow!

[Nick Rowe]

But if people wait until the last minute (as so many of us do), then July 1 2011 seems a bit late to raise it. I hope we don't need the biggest part of this stimulus as late as June 2011.