freethinker has it correct (even if simplified). Remember to consider that the tax was designed to accomodate for those earning less with rebates and core items being exempt.
take a look at this:
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Economists leery of proposed GST reduction
Updated Thu. Dec. 1 2005 4:10 PM ET
Canadian Press
OTTAWA — Economists say a cut in the GST might be politically popular among consumers who are hit on every coffee and each doughnut. But they don't like the idea as an economic tool. They're wary of Stephen Harper's promise to cut the GST by two percentage points over the next five years.
"Stupid, stupid, stupid, stupid," said Christopher Ragan, a McGill University economist who favours the Conservatives.
He said people may like it because "it's the tax people love to hate."
But pollster Bruce Anderson of Decima Research, suggest that a GST cut may not find that much support even with regular folk.
"Canadians have in the past felt somewhat more drawn to a GST cut than an income tax cut because they saw it as being more visible, and potentially more rewarding," he said.
But now that both the Liberals and Tories say tax cuts are doable "it's not so clear that they would favour the consumption (tax cut) over the income tax cut, especially if there were a vigorous debate about the economic advantages of one or the other."
Harper's plan contrasts with that of the Liberals and Paul Martin, who say cutting income taxes is the way to go.
It's a political back flip for both. The Conservatives, whose predecessors imposed the GST over political and public anger in 1991, now want to cut it. The Liberals, who in 1993 promised to eliminate the GST, now defend it.
Economists say the GST may be politically unpopular, but it's a transparent and efficient way to raise government revenue. Because it's a consumption tax, a cut in the GST rate tends to encourage spending, while an income tax cut tends to encourage saving.
Harper has said a Tory government would cut the seven-per-cent GST to five per cent. The first cut of one percentage point would come immediately, the other would arrive within five years.
"I believe it's a poor idea," said economist Mike Veal of McMaster University in Hamilton. He said most economists would choose an income tax cut.
Jim Davies, who teaches economics at the University of Western Ontario, said he would prefer income tax cuts.
"Most serious work done by economists who specialize in public finance indicates that the GST is a more efficient tax source than the income tax," he said. "If the income tax cut is designed properly it can provide similar benefit to lower-income taxpayers."
Benjamin Alarie, a University of Toronto economist, agreed that an income tax cut is the right route if the idea is to help lower-income people.
"The move to increase the personal exemption of the income tax, if the concern is to help low-income Canadians particularly, that would be a nice way to do it," Alarie said.
Robin Boadway, a Queen's University economist, said there is another way to help low-income earners, by increasing the refundable GST tax credit.
Boadway suggested the Conservatives are actually looking for way to cut government revenue and thus spending, with an eye to reducing the overall size of the federal government and bolster the provinces.
Kul Bhatia, an economist at the University of Western Ontario, said it looks like Harper was driven to cut the GST because the Liberals had already taken the income tax cuts.
Bhatia said he doesn't like tinkering with taxes at election time, especially with a tax like the GST, which was carefully tuned when it was brought in to balance income with tax credits for the poor.
There were few details available about the mechanics of the Harper tax cut.
For example, New Brunswick, Newfoundland and Labrador and Nova Scotia have a harmonized federal-provincial sales tax. It's not clear how the Tory cut would affect the provincial take.
New Brunswick Finance Minister Jeannot Volpe said he doesn't mind a cut, as long as it doesn't cost the province.
"It means the money would have to come from somewhere else," Volpe said. "All I'm saying is that if there are federal transfers for New Brunswick to balance that amount of money, as long as we have the money to deliver services in the province, that's what matters."
The GST took in almost $30 billion in the last fiscal year. Harper says the first stage of cuts would cost the federal treasury $4.5 billion.
The Conservatives say, though, that the cut would encourage people to spend more, providing extra GST revenue to make up the shortfall.
Bhatia called that claim "tenuous" and said he'd like to see what the economic models say.
A one-per-cent cut would save a buyer $250 on the purchase of a $25,000 car or about $1 on a $100 pair of shoes.
"One per cent on a car is fair amount of money," said Veall. "If you buying a chocolate bar then we're literally talking about a penny."
He said the GST makes a good target for politicians because it's in front of the taxpayer every day.
Even Finance Minister Ralph Goodale acknowledges that the GST can be an annoyance and an aggravation.
People may not study their pay stubs every week to notice an income tax cut, but the GST comes up on almost every purchase.
Harper himself used the argument in pushing his cuts:
"This will be a tax cut that you will see every time you shop, tax relief that you experience, a tax break that no politician will be able to take away without you noticing."
But Larry Marks, shopping in downtown Ottawa on Thursday, wasn't impressed.
"It's going to save what? A nickel on a pack of cigarettes?"
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CTV News)
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