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					MODELING CHANGES TO THE GST AND ITS CREDIT USING
THE SPSD/M

Chantal Hicks
100 Tunney‟s Pasture Driveway, 24-O, Ottawa, Ontario, Canada, K1A 0T6 ;
email: chantal.hicks@statcan.ca
Jennifer Jones
100 Tunney‟s Pasture Driveway, 24-N, Ottawa, Ontario, Canada, K1A 0T6;
email: jennifer.jones@statcan.ca


ABSTRACT: This paper will examine the amount of Goods and Services Tax (GST) paid by
families since 1992. The Social Policy Simulation Database and Model (SPSD/M), a Canadian
static microsimulation model is used to look at these impacts. The GST was first introduced in
1991 at a rate of 7%. The rate was lowered in July 2006 to 6%. Prior to the cut, the GST paid by
families grew faster than inflation, total federal taxes, and disposable income. The GST refundable
credit was introduced at the same time in order to mitigate the regressive impacts of the tax. The
value of the credit was eroded in the 1990s as the credit was not indexed to inflation until the year
2000. The 2007 cut in the GST rate meant that the average amount of GST paid by families, net of
the credit, was reduced to 1999 levels. When examined by income group, the reduction of the rate
meant that families who made less than $35,000 paid similar amounts of GST in 2007, net of the
credit, as they did in 1992 while families who made more than $35,000 paid more GST in 2007
than they did in 1992.


1. INTRODUCTION


The goods and services tax (GST) was introduced in Canada in 1991 to replace the manufacturer‟s
sales tax. Its introduction was controversial – “The implementation of the government‟s proposed
goods and services tax (GST) has engendered more public discussion and debate than any proposed
tax change in Canada‟s history” (Brooks, 1990: 1). This paper will first describe the tax along with
the accompanying credit. It will then describe the Social Policy Simulation Database and Model
and will summarize some of its main uses throughout the years for analyzing the GST. Finally, an
analysis will be presented which shows how the GST and its credit have fared since their
introduction.




                                           -1-
2. THE GST AND THE GST TAX CREDIT


The GST was introduced in Canada in 1991, replacing the manufacturer‟s sales tax (MST). The
GST is similar to a value-added tax (VAT). The buyer of the good or service pays the tax. If the
buyer of a good adds value to it and then sells it, they collect the tax from that sale. They keep the
GST they paid initially and give the rest to the government. This ensures that the final consumer
pays the tax.


The GST rate was set at 7% at its introduction and remained at that level until June 30, 2006. The
government reduced the rate to 6% at that time and promised to reduce the rate to 5% at some
future date. Certain goods are zero-rated such as food, prescription drugs, and livestock; while
others are tax-exempt such as rent, health care and domestic financial services. i There are other
complexities to the design of the GST such as the partial rebate of the GST paid on new home
construction. The GST in Canada is a highly visible tax - retailers must show the GST on their
receipts.


Figure 1 shows the total amount of GST collected in the period. There was a 50% increase from
1992 to 2005, its peak, in constant dollars. „The rise can be attributed to increased consumer
spending, which in turn has been influenced by factors such as population growth, family make-up,
favourable economic conditions, higher income levels, easier credit, lower interest rates, and
changing spending patterns‟ (Chawla 2006: 14).



  3500
  3000
  2500
  2000
  1500
  1000
    500
      0
        92

        93

        94

        95

        96

        97

        98

        99

        00

        01

        02

        03

        04

        05

        06
     19

     19

     19

     19

     19

     19

     19

     19

     20

     20

     20

     20

     20

     20

     20




                               $000,000 (2002 dollars)


Figure 1 GST collected




                                           -2-
When the GST was introduced, it was understood that there would be some regressive effects as
people with lower incomes would pay a relatively larger proportion of their income to the GST than
they did with the manufacturer's sales tax. The government introduced a refundable GST tax credit,
paid quarterly, which would ensure that people who made less than $30,000 would not lose money
in the transition from the MST to the GST. “(…) by integrating more fully the sales and income tax
systems through refundable credits we will be able to gain the economic benefits of an efficient tax
on consumption while furthering the objective of greater tax fairness” (Canada 1989:6).


The following figure shows the design of the GST tax credit from 1992 to 1998. The levels were
slightly lower in 1991. It's a family based program for persons aged 19 or over. The maximum
benefit is defined in the following way:
            $199 for each adult
            $105 for each child (<19)
            up to $105 for people who live alone and for single parents. This amount depends on
             the person's income and calculated as 2% of income over $6,456 (to the maximum of
             $105)
The benefit is reduced at a rate of 5% of family's net income over $25,291.

                           GST credit

  800                                              Single person

  600                                              Couple, no kids
  400
                                                   Single person
  200                                              with 1 kid
     0                                             Single person
         0    10000 20000 30000 40000              with 2 kids
                                                   Married couple,
                Family net income
                                                   2 kids

Figure 2 Typical GST credit by income and family type


There have been two changes to the design of the credit since 1992. In 1999, all single parents got
the maximum supplement of $105 – it no longer depended on the receipt of income. The additional
$105 for unattached individuals remained tied to their income. In 2000 the credit was indexed to
inflation. Previously, it was considered to be a partly indexed program since it would only increase
if inflation was over 3%. But during this time period, inflation remained under 3% and therefore
the levels remained the same. As Figure 3 shows, this eroded the value of the credit. ii

                                            -3-
                             Maximum GST credit for single people

  250
  240
  230
  220
  210
  200
  190                                                     `
  180
  170
  160
  150
      91

                                  93

                                          95

                                                  97

                                                          99

                                                                  01

                                                                          03

                                                                                  05

                                                                                          07
   19

                               19

                                       19

                                               19

                                                       19

                                                               20

                                                                       20

                                                                               20

                                                                                       20
                                           Constant $ (2002)              Current $

Figure 3 Maximum GST credit for an unattached individual, constant and current dollars


However, the next figure seems to indicate that there was an increase in the total amount of the
credit which was paid out to Canadians in the 1990's despite the lack of indexation. Explanations
for this effect is population growth and the fact that incomes during this period grew more slowly
than inflation.

                             3500
   $000,000 (2002 dollars)




                             3000
                             2500
                             2000
                             1500
                             1000
                             500
                               0
                                  92

                                  93
                                  94

                                  95
                                  96

                                  97

                                  98

                                  99

                                  00
                                  01

                                  02

                                  03

                                  04

                                  05

                                  06
                               19

                               19
                               19

                               19
                               19

                               19

                               19

                               19

                               20
                               20

                               20

                               20

                               20

                               20

                               20




                                                                                               Source: IEAD

Figure 4: GST credit paid to Canadians (constant 2002 dollars)


3. THE SOCIAL POLICY SIMULATION DATABASE AND MODEL (SPSD/M)


3.1 Short Overvie w of the SPSD/M
The SPSD/M was first released in the fall of 1988. It consists of a static microsimulation model
(SPSM) and a synthetic database (SPSD). The following is a brief description of the database and
the model. For more information, please see Bordt et al. (1990) or the SPSD/M Database Creation

                                                                               -4-
Guide. The latter can be downloaded as part of the SPSD/M help system from Statistics Canada's
website (Statistics Canada 2007).


The current version of the database is created by combining four different datasets. Figure 5 gives a
schematic overview of the entire process. The core dataset is the 2002 Survey of Labour and
Income Dynamics (SLID) public use microdata file. It is a sample of 32,886 families representing
56,216 individuals and it provides the demographic information for the SPSD as well as the starting
point for the incomes of individuals. Information is then added from a sample of personal income
tax records (previously referred to as the Greenbook file). This data is used in two ways. First, it is
used to stochastically impute deductions which are not available on SLID. Secondly, individuals on
SLID which have high incomes are cloned and their incomes are replaced by averaged data from
the tax records. This ensures that results from the SPSM will be able to reproduce aggregate totals.
Employment Insurance histories from an administrative dataset are then added to the dataset for
people who had, or might have in some other year employment insurance. Finally, in order to be
able to model consumption taxes, household expenditure patterns are imputed to each household on
the database from the Survey of Household Spending.




                                            -5-
                                                                                                                         GREEN
                                                                                                                         BOOK

                                                    SLID

                                                                                                 High
                                                                                               Income
                                                                                                Filers




                                                 Split Database                             Micro Reco rd
                                                                                            Aggregation

   EI Admin
   Histories




                           EI                       Others                        High                  Averaged
                        Recipients                                              Incomes                Individuals




  Stochastic                                                      Household               Stochastic                    Compute
    Match                                                         Duplication               Match                      Distribution




                                                                 Impute
                                                              Classification                                             SHS
                                                                Variables




                                                                  Stochastic                                           Combine and
                                                                  Imputation                                              Adjust




                                                                                                    Stochastic
                                                                                                      Match




                                                                                                       SPSD

 Sources:
 SLID: Survey of L abour an d Income D ynamics
 SHS: Surve y of H ousehold Spending
 Greenb ook: Sam ple of T 1 Returns
 EI Admin: Sample o fHRDC Admin Reco rds
 Demographic projections




Figure 5 Overview of the SPSD creation


The SPSM is a static microsimulation model which reads in the SPSD and calculates people's taxes
and transfers. Taxes modelled include income taxes (both federal and provincial), payroll ta xes,
provincial health premiums, and commodity taxes.                                                              Most cash transfers from the federal and
provincial governments are either modelled or included in the database. Modelled transfers include
federal and provincial elderly programs, a vast array of children's programs, e mployment insurance,
and refundable tax credits.


Version 14.2 of the SPSM can simulate the tax and transfer systems from 1991 to 2012. Analyses
can be done either by statically aging the database to represent the various years, or by deflating the
tax/transfer parameters and doing all analyses in the base year (most recently 2002). The static


                                                                                    -6-
aging technique consists of two parts. First, household record weights are created which reproduce
the correct age, sex and province distribution as well as the yearly amount of employment and
unemployment. Dollar items are then scaled in order to match known or forecasted growth for
various income and expenditure components.


3.2 How the SPSD/M models the GST credit and the GST
The SPSM calculates the GST credit by applying the rules of the program (see section 2) to each
family on the database. However, there are two complexities to this calculation. The calculation of
the credit is based on the previous year's income. In order to model this, the income calculated in
the model is deflated to represent the previous year's income. This will have the effect of making
income across years more homogeneous than it actually is. Furthermore, large changes in other
transfer programs which may affect the previous year's income may not be reproduced. The second
complexity has to do with the timing of the cheques. The GST credit is paid quarterly with the first
cheque given in July of the year following the receipt of income, followed by cheques in October,
January and April. However, if the total amount of GST credit is less than $100, the entire amount
is given in July. The model provides two ways of calculating the GST credit. In the first, the entire
amount is given in July. This means that only one set of algorithms for the credit is applied and
only the previous year's income (deflated from the current year) is calculated. In the second
method, the SPSM uses two algorithms to model the credit. It deflates the income to represent the
previous year and applies an algorithm to calculate the amount which would be paid in July and
October. It then deflates the income again to represent the income from two years preceding the
year in question and applies the algorithm of the previous year in order to calculate the amount
which would have been paid in the January and April cheques. In this paper, we use the first
method as it has fewer assumptions about year to year income stability. Figure 6 shows that the
SPSM model's estimate of the GST credit is slightly low in some years compared to estimates from
the System of National Accounts. Part of this difference may also be explained by the fact that
natives on reserves and people living in the territories are excluded from the SPSM.




                                           -7-
  4000
  3500
  3000
  2500
                                                                     IEAD
  2000
                                                                     SPSM
  1500
  1000
   500
      0
        92


                94


                        96


                                98


                                        00


                                                02


                                                        04


                                                                06
     19


             19


                     19


                             19


                                     20


                                             20


                                                     20


                                                             20
Figure 6 Total GST credit, in millions of dollars (2002$)


In order to calculate the GST and other commodity taxes another model, COMTAX, produces
parameters which are read in by the SPSM. The input-output model COMTAX produces effective
tax rates for 10 commodity taxes for each of the 48 personal expenditure categories, for example,
food, alcohol, tobacco, semi-durables. This macroeconomic model assumes that firms pass their
sales tax burden forward to the final consumer of the product. So taxes include both direct taxes
(taxes paid by the final consumer as they pay for a good) as well as indirect taxes (taxes from the
intermediate stages of production and passed on to the final consumer which are included in the
price of a good). In 2002, 8% of the GST paid by the personal sector was in the form of indirect
taxes. The effective commodity tax rate is taxes paid (both direct and indirect) divided by the
expenditure excluding taxes.


The COMTAX model produces commodity taxes for the entire economy. The effective tax rates
for the personal sector produced by the COMTAX model are then input into the SPSM as
parameters. The household expenditures on the SPSD are multiplied by the tax rates to produce the
commodity taxes paid iii.


The SPSM does not model all revenue collected from the GST because other final demand sectors
(not just current expenditures of households) also pay GST. The most significant of these excluded
sectors is residential construction. As the SPSM is an annual model and housing is an asset usually
paid off in many years, the GST on residential housing was not included in version 14.2 of the
model. Estimates of total GST will therefore be lower than those found in other sources as the GST
from the personal sector represented about 80% of total GST. This can be seen in Figure 7 which
compares the GST simulated by the SPSM to that reported in the System of National Accounts.


                                               -8-
  3500
  3000
  2500
  2000                                                               IEAD
  1500                                                               SPSM

  1000
   500
      0
        92


                94


                        96


                                98


                                        00


                                                02


                                                        04


                                                                06
     19


             19


                     19


                             19


                                     20


                                             20


                                                     20


                                                             20
Figure 7 Total GST, in millions of dollars ($2002)


3.3 Selected analyses of the GST and the GST tax credit using the SPSD/M
The SPSD/M has been widely used to analyse both the GST and its credit. The studies started
before the introduction of the GST. In 1990, two studies used the SPSD/M to assess the new GST
and compared it with the manufacturer's sales tax that it was replacing. Grady (1990) examined the
distributional impacts of the proposed GST package in its starting year. Including the expected
increases to the indexed transfer programs (such as Old Age Security), he found that the
consumable income iv of the average census family would drop by over $400 and that there would
be a negative impact for all family types and income levels. Brooks (1990) compared the effects of
the proposed GST platform with an alternative which repealed the MST and replaced the revenues
with a surtax on income. v


Other studies followed. The Ontario Fair Tax Commission (1992) used the SPSD/M to assess
proposed changes to the RST in light of the GST. Kesselman (1994) proposed replacing the GST
with a direct consumption tax. Mitchell and Shillington (2004) looked at tax cuts which could be
aimed at low income people, including income tax cuts, a GST cut, and an increase to the GST tax
credit (to make up for the lost amount due to the lack of indexation from 1992-1999).


During the 2006 election campaign, interest in the GST was rekindled when the Conservative party
proposed an immediate reduction of the GST to 6% and a subsequent reduction to 5%. As the
Liberal party was proposing income tax cuts in their platform that year, two newspapers published
articles using the SPSD/M during the election campaign which examined the distributional impact
of income tax cuts as opposed to a cut to the GST (see Daw (2005) and McFarland (2006)). The


                                               -9-
C.D. Howe Institute (Poschman 2006) published a study which used the model to examine the
expected impact on other taxes and transfers which would result from the proposed GST cut due to
changes in inflation. The Canadian Centre for Policy Alternatives (Block and Russell, 2006) used
the SPSM to propose revenue neutral changes to the conservative platform. Part of their proposal
was to keep the GST rate at 7% and to increase the GST tax credit arguing that a greater proportion
of low income families would see the benefit of such a change. The Fraser Institute (Clemens et al
2006) used to model to propose a complete restructuring of the fiscal arrangements in Canada.
Under their proposal, the federal government would eliminate the Canada Health Transfer and the
Canada Social transfer to the provinces. The provinces would then make up this missing revenue
by increasing (or creating) the provincial rate of a harmonized GST.


One of the reasons for developing the Social Policy Simulation Database and Model in the 1980's
was to allow interested groups outside of the major government departments to analyse tax changes
(Bordt 1990). Analyses of the GST and its credit by a variety of groups, representing a variety of
opinions, show that the model has achieved this goal.




                                          - 10 -
4. THE GST NET OF ITS CREDIT, 1992 TO 2007 vi


This section will analyse how families have fared given the changes to both the GST and the GST
credit rules since 1991. The primary focus will be on net GST, here defined as GST minus the GST
tax credit. As the credit is based on family income, the analysis will be done at the nuclear family
level, defined as a head, their spouse (if there is one), and their children under the age of 18, living
together in the same dwelling. For the purposes of this paper, unattached individuals are also
included as nuclear families of size 1. The analysis was done using version 14.2 of the SPSD/M
and results were converted to 2002 dollars using the consumer price index.


Figure 8 shows that the average amount of the GST, net o f the credit, was around $1,000, in 2002
dollars, from 1992 to 1996. It then increased to over $1,200 by 2001 where it remained until the
GST tax rate cut in July 2006. The average total GST followed the same pattern.



  1600
  1400
  1200
  1000
   800
   600
   400
   200                                              Avg GST     Avg net GST
     0
        92

        93
        94

        95
        96
        97

        98
        99

        00
        01

        02
        03
        04

        05
        06

        07
     19

     19
     19

     19
     19
     19

     19
     19

     20
     20

     20
     20
     20

     20
     20

     20




                                                          Source: SPSD/M 14.2

Figure 8 Average GST paid by nuclear families (2002$)


Net GST grew faster than both total federal taxes from individuals (defined as federal income taxes,
payroll taxes, and commodity taxes, including the GST paid by individuals) as well as disposable
income from 1992 to 2006 as can be seen in Figure 9. This figure also shows that the consumer
price index, which is deflating all of these series, grew faster than income or taxes for most of the
1990‟s.




                                           - 11 -
  1.35
  1.30        Net GST

  1.25        Total Federal Taxes
  1.20        Disposable income
  1.15
  1.10
  1.05                                  `
  1.00
  0.95
  0.90
       92

       93

       94

       95

       96
       97

       98

       99

       00

       01

       02

       03

       04

       05

       06

       07
    19

    19

    19

    19

    19
    19

    19

    19

    20

    20

    20

    20

    20

    20

    20

    20
Figure 9 Growth in the average net GST, federal taxes, and disposable income (deflated to $2002)


The average GST credit was $225 in 1992 and declined to $170 by 2007. The decline was larger in
the 1990's when the lack of indexation eroded the value of the credit. When the average is
calculated for families who receive the credit, the average value of the credit was $360 in 1992 and
declined to $320 by 2001. The percentage of families who received the credit ranged from 62% in
1992 to 53% in 2007.

  400
  350
  300
  250
  200
  150
  100
   50                   All families   Families who got the credit
    0
       92

       93

       94

       95

       96
       97

       98

       99

       00

       01

       02

       03

       04

       05

       06

       07
    19

    19

    19

    19

    19
    19

    19

    19

    20

    20

    20

    20

    20

    20

    20

    20




                                                         Source: SPSD/M 14.2

Figure 10 Average GST credit for families (2002$)


Some families' expenditures are so low that the GST credit they receive is larger than the GST they
paid during the year. The SPSM estimated that 17% of families were in this situation in 1992 and
that the proportion declined to 10% by 2001. These estimates may be slightly high as the SPSM
assumes that for households which contain multiple families, the families‟ proportion of
expenditures is the same as the family‟s share of income. This will not be true in many families -
an example might be an adult university student who lives with their parents may have more money

                                            - 12 -
to spend than their income would reflect.           However, the trend remains whe n we examine
households, with 11% of households receiving more credit than they paid in taxes in 1992, dropping
to 5% in 2002.

  18%
  16%
  14%
  12%
  10%
   8%
   6%
   4%
   2%
   0%
       92

       93

       94

       95

       96

       97

       98

       99

       00

       01

       02

       03

       04

       05

       06

       07
     19

     19

     19

     19

     19

     19

     19

     19

     20

     20

     20

     20

     20

     20

     20

     20
                                                         Source: SPSD/M 14.2

Figure 11 Percentage of families whose GST credit is bigger than their GST paid


4.1 The GST and GST credit by income group
As expenditures (and hence commodity taxes) tend to rise with income and since the GST credit is
calculated based on income, net GST will vary by income level. This section will look at the
changes to net GST by income group for four years: 1992, the second year of the program; 1997
after five years of no indexation to the credit; 2002, the impact two years after the full indexation of
the credit; and 2007, the year with the full year impact of the GST rate cut from 7% to 6%.


The income groups are defined using 2002 dollars. The income concept used is market incomevii
plus government transfers minus income taxes, payroll taxes and health premiums.             Figure 12
shows that the distribution of families within these income groups have changed with families in
2002 and 2007 having more income (in 2002 dollars) than families in 1992 and 1997. The average
family income in 1992 was 34,000 and it rose to 39,000 by 2007 (in $2002 dollars). This section
will analyze net GST within each income group.




                                           - 13 -
  100%


   80%

                                                                       1992
   60%
                                                                       1997
                                                                       2002
   40%
                                                                       2007

   20%


    0%
              00

              00

              00

     00 00 0

              00

     00 00 0

              00

              00


        01 0
     00 000




              ax
             00
  20 150

  30 250

  40 350




  60 550




  80 750

  90 850




           -M
          45




          65




          95
          -5
        in

       1-

       1-

       1-

       1-

       1-

       1-

       1-

       1-

       1-
      m




     00
     00

     00

     00




     00




     00

     00
  10
  10




  50




  70




                       Disposable income (2002 $)
                                                       Source: SPSD/M 14.2

Figure 12 Cumulative distribution of families, by income group and year


Of the four years examined, the average net GST paid (GST minus the tax credit) was highest in
2002 for all income groups (see Figure 13). In order to be able to see what is happening at the
smaller income groups, the >100,000 was omitted from the graph. viii For families with incomes
greater than $35,000, the GST cut meant that their average net GST paid was lower in 2007 than in
1992. For families with income less than $35,000, the average net GST paid in 1992 was usually
lower, but very similar to that paid in 2007 by families in the same income group.



   4000
   3500
   3000
   2500                                                                1992
   2000                                                                1997
   1500                                                                2002

   1000                                                                2007

    500
      0
     00 00 0

              00

              00


                0

                0

              00

              00


                0

                0




   -500
               0




             00

             00




             00

             00
             00




  30 250

  40 350




  70 650

  80 750
          15




          45

          55




          85

          95
          -5
        in

       1-

       1-

       1-

       1-

       1-

       1-

       1-

       1-

       1-
      m

     00




     00

     00

     00

     00

     00

     00

     00
  10

  20




  50

  60




  90




                       Disposable income ($2002)
                                                        Source: SPSD/M 14.2

Figure 13 Average GST net of credit paid by families, by year and income group

                                          - 14 -
The reason that $35,000 was the crossover point can be seen in Figure 14. For families with
incomes from $35,000 to $40,000, only 43% in 1992 and 23% in 2007 received the credit.
The figure also shows that not all families who had less than 10,000 of income received the GST
credit. This is due to their young age: single people under the age of 19 are not eligible for the GST
credit. Though they only represent 3% of all families in 2002, they represented 25% of families
with incomes of less than $5000 and 10% of families with income between $5,001 and $10,000.



  100%
   80%                                                                 1992
   60%                                                                 1997
   40%                                                                 2002
   20%                                                                 2007

    0%
              00

              00

              00

     00 00 0

              00

     00 00 0

              00

              00


        01 0
     00 000




              ax
             00
  20 150

  30 250

  40 350




  60 550




  80 750

  90 850




           -M
          45




          65




          95
          -5
        in

       1-

       1-

       1-

       1-

       1-

       1-

       1-

       1-

       1-
      m




     00
     00

     00

     00




     00




     00

     00
  10
  10




  50




  70




                        Disposable income 2002 $
                                                        Source: SPSD/M 14.2

Figure 14 Percent of families who receive the GST credit, by income group and year


The average value of the GST credit was greatest in 1992 (see Figure 15) but declined thereafter
across all income groups. Its value decreased due to lack of indexation to 1997, and the decreases
slow after indexation was introduced in 2001.




                                           - 15 -
      500
      450
      400
      350
                                                                                                                  1992
      300
                                                                                                                  1997
      250
                                                                                                                  2002
      200
                                                                                                                  2007
      150
      100
       50
        0
        00




                                                                                                      ax
                   0

                           0

                                      0

                                              0

                                                         0

                                                                 0

                                                                           0

                                                                                     0

                                                                                              0
                 0

                            0

                                    0

                                               0

                                                       0

                                                                  0

                                                                          0

                                                                                     0

                                                                                              0

                                                                                                     M
         0
              50

                         50

                                 50

                                            50

                                                    50

                                                               50

                                                                       50

                                                                                  50

                                                                                           50
      -5




                                                                                                  1-
             -1

                     -2

                                -3

                                        -4

                                                   -5

                                                           -6

                                                                      -7

                                                                               -8

                                                                                         -9
   in




                                                                                                 0
          1

                     1

                             1

                                        1

                                                1

                                                           1

                                                                   1

                                                                              1

                                                                                       1
  m




                                                                                              00
       00

                  00

                          00

                                     00

                                             00

                                                        00

                                                                00

                                                                           00

                                                                                    00

                                                                                           10
      10

              20

                         30

                                 40

                                            50

                                                    60

                                                               70

                                                                       80

                                                                                  90
                                      Disposable income ($2002)
                                                                                                  Source: SPSD/M 14.2

Figure 15: Average GST credit by income group and year


Figure 16 shows that the average proportion of income that a family pays in GST, net of the credit,
increases as income increases up to $35,000. The ratio of income spent on the GST then declines
slightly as income rises. The average GST net of the credit is usually negative for families with
incomes less than $5,000 and is therefore omitted from the graph.



      0.05
      0.04                                                                                                 1992
      0.03                                                                                                 1997
      0.02                                                                                                 2002
      0.01                                                                                                 2007
      0.00
       00 00 0

                 00

                 00




                 00

       00 00 0

                   0

                   0

                  00
                 00




       00 000




       00 00

                00
    15 1 00




    35 300

     00 400




    65 600




               00
              20




              70

    85 80

              90
               0




            10
            -5
            -

           1-

           1-

           1-




           1-

           1-

           1-

           1-
         01




          in




         1-
       00




       00




       00
       m




      00
      50



    25




    55




    75



   95
  45




                                     Disposable income ($2002)
                                                                                         Source: SPSD/M 14.2

Figure 16 Average of the proportion of income which a family pays in GST, net of the credit, by
income group and year


There is a large amount of variability in the net GST paid within these income groups. Figure 17
shows the distribution of net GST by income group for 2002. This variability is mostly due to the


                                                                      - 16 -
variability of GST paid (as the credit is more closely tied to income). It stems from various sources,
such as the proportion of income that is saved as opposed to spent, the amount of money received
from other sources which is spent, ix and the mix of goods a family purchases.




Figure 17 Distribution of net GST in 2002 by disposable income


For example, families who have non-zero expenditures on tobacco spent more on average on GST
than families who did not (Figure 18).



  1400
  1200                                     Some
  1000                                     expenditures on
   800                                     tobacco
   600                                     No tobacco
   400                                     expenditures
   200
     0
          1992    1997   2002    2007


Figure 18 Average net GST paid by families, by presence of tobacco expenditures




                                           - 17 -
The analysis by income group has compared families who made the same amount of income (in
2002 dollars) across different years. However, families have also become richer in that 15-year
period. If instead the population is partitioned into income deciles, as seen in Figure 19, the average
amount of net GST paid by families in the top three deciles were very similar in 1992 and 2007,
whereas families in the lower deciles paid less GST in 1992. Figure 20 shows that the average
proportion of income spent on net GST was lower for the bottom 6 deciles in 1992. This is quite a
different message than was seen when looking at the proportion using fixed income groups where
there was little difference between 1992 and 2007.

  4500
  4000

  3500

  3000
  2500                                                                            1992
                                                                                  1997
  2000
                                                                                  2002
  1500                                                                            2007
  1000

   500

      0
          1st   2nd   3rd    4th    5th     6th     7th     8th    9th   10th
   -500
                       Disposable income deciles
                                                                    Source: SPSD/M 14.2

Figure 19 Average GST net of the credit for families by disposable income decile



  0.05

  0.04
                                                                                  1992
  0.03                                                                            1997

  0.02                                                                            2002
                                                                                  2007
  0.01

     0
          2nd   3rd    4th    5th     6th         7th     8th     9th    10th
                       Disposable income deciles
                                                                    Source: SPSD/M 14.2

Figure 20 Average proportion of income spent on net GST by disposable income decile


4.2 The possible impact of the GST under different scenarios

                                                   - 18 -
The above sections estimated the change to the net GST across four years. The GST and the GST
credit rules changed during this period, and there were also changes to the population and the
economy. This section will compare four different tax scenarios on the same population, 2007.
The base scenario keeps the 2007 status quo. The first alternative keeps the GST rate at its original
7%. The second keeps the rate at 6% but assumes that the GST credit was never indexed. The final
scenario keeps the rate at the original 7% but assumes that the GST credit was indexed starting in
1992. Table 1 shows that in all three scenarios, the average net GST paid by families increased.
The average increase was largest when the credit was kept the same and the GST rate cut was
removed and the original 7% rate was reintroduced. The increase was least when the 6% rate was
maintained and the indexation of the credit was removed.


Table 1: Difference between the average net GST paid by families between the base 2007 scenario
and three alternatives
GST rate at 7%                                                                                 210
GST rate at 6%, assumes GST credit was never 47
indexed
GST rate at 7%, assumes GST credit was fully 88
indexed starting in 1992


Figure 21 shows that under two scenarios, all families ended up paying more net GST. The only
scenario in which some families, on average, paid less net GST was the one with a 7% tax rate and
a fully indexed GST credit. Families who made less than $40,000 paid less in net GST but families
who made more than $40,000 paid increasingly more. The biggest reduction was for families who
had incomes of $25,000 to $40,000.

  1000
   800
                                                                                                     Rate: 7%
   600
   400                                                                                               Rate 6%, credit
   200                                                                                               never indexed
      0                                                                                              Rate 7%, credit
                                                                                                     indexed from 1992
          min-5000




   -200
                     20001-25000


                                   40001-45000


                                                 60001-65000


                                                               80001-85000




   -400
                                                                                  100001-Max




Figure 21: Average family difference from 2007 base year system of other options.


                                                                             - 19 -
5. CONCLUSION
This paper examined how the amount of GST paid, net of the refundable credit, has changed since
1992. It appears that the 2007 cut in the GST rate meant that the average amount of net GST paid,
was reduced to 1999 levels. When examined by income group, the reduction of the rate meant that
families who made less than $35,000 paid similar amounts of GST in 2007, net of the credit, as they
did in 1992.


6. REFERENCES

Block, Sheila and Ellen Russell, “Standing Up For Which Families? Who Benefits from the
Conservative Tax Cut Promises”, Alternative Federal Budget 2006, Canadian Centre for Policy
Alternatives, Technical Paper 4, March 29, 2006.

Bordt, M., G. Cameron, S. Gribble, B. Murphy, G. Rowe and M. Wolfson, (1990) "The Social
Policy Simulation Database and Model: An Integrated Tool For Tax/Transfer Policy Analysis", The
Canadian Tax Journal, January/February 1990.

Brooks, N (1990) „Searching for an alternative to the GST‟, Discussion paper 90.C.1, The Institute
for Research of Public Policy.

Canada (1989) „Goods and Services Tax: Technical Paper‟, issued by Michael H. Wilson,
Department of Finance.

Chawla, R.K. (2006) „The GST credit‟, Perspectives on Labour and Income, 75-001-XIE, vol 7 no
6, 13-21

Clemens, J., N. Veldhuis and M. Palacios, “Fiscal Balance, the GST, and Decentralization An
opportunity for Reform”, The Fraser Institute, October 2006.

Daw, James (2005) 'Which tax cut is biggest?; Toss- up between Tory, Grit promises', The Toronto
Star, Saturday December 3rd, 2005, p. D2

Ernst & Young (1990) Goods and Services Tax: An analysis by Ernst & Young

Fair Tax Commission (1992) Working Group Report: Retail Sales Tax / Goods and Services Tax.

Gillespie, W.I. (1991) „How to create a tax burden where no tax burden exists: a critical
examination of Grady‟s “An analysis of the distributional impact of the goods and services tax”‟,
Canadian Tax Journal, vol 39, no 4, 925-936

Grady, P (1990) „An analysis of the distributional impact of the goods and services tax‟ Canadian
Tax Journal, vol 38, no 3, 632-643

Grady, P. (1991) „The distributional impact of the goods and services tax: a reply to Gillespie‟,
Canadian Tax Journal, vol 39, no 4, 937-946.

Kesselman, J.R. (1994) „Assessing a direct consumption tax to replace the GST‟ Canadian Tax
Journal, vol 42, no. 3, 709-805.

                                           - 20 -
Macfarland, Janet (2006) 'GST plan proves better for the Poor', The Globe and Mail, p. A1,
Tuesday, January 12, 2006

Mitchell A, Shillington R (2004) 'Federal tax relief for low income people', Discussion Paper
prepared for the National Anti-Poverty Organization, (http://www.napo-
onap.ca/en/issues/tax_cutps.php) [accessed 8 July 2007]

Poschman, F. (2006) „Ready for relief: there‟s more to a lower GST than meets the eye‟, CD-Howe
e-brief, www.cdhowe.org, april 2006

Ruggeri, G.C., Van Wart, D., Howard, R. (1994), „Equity aspects of sales taxes and income taxes‟,
Canadian Tax Journal, vol 42, no. 5, 1263-1275

Statistics Canada (2007), 'SPSD/M Online Documentation Version 14.2',
http://www.statcan.ca/english/spsd/spsdm.htm. Accessed July 10, 2007.


i
   The difference between zero-rated and tax-exempt is that with zero-rated goods the business is able to claim an input
tax credit while tax-exempt the businesses pay the tax on their inputs.
ii
    Note that the CPI used in this paper is not exactly the one used for the indexat ion of the GST cred it.
iii
    There are t wo main adjustments made to expenditures in the SPSD. Firs t, the household's expenditures are adjusted
to match the household's income and other money receipts. This is done since the expenditures from the SHS are
stochastically matched onto the SPSD; the inco mes fro m both records may not be a perfect match. Fu rthermore, since
the sample size of the SHS is s maller than that of the SPSD, records of the SHS may be matched mu ltip le times to
SPSD records with various incomes. Secondly, the expenditures are adjusted so that they reproduce the total
expenditures of the personal expenditure sector produced by the COMTAX model for each province and expenditure
category. This adjustment means that certain underreported expenditure items, such as alcohol and tobacco, are better
represented and that total taxes produced by the SPSM should tend to reproduce the total taxes seen in the personal
sector. This sector also includes expenditures by tourists and non-profit organizations. The expenditures on the SPSD
were increased by 12% due to this adjustment.
iv
    Consumable inco me is defined as market inco me plus transfer inco me minus income taxes, payroll taxes, health
premiu ms and commod ity taxes.
v
   He also increased tobacco, alcohol, and gas excise taxes to maintain prices on those commodit ies
vi
    The assumptions and calculations underlying the simu lation results in this section were specified by the authors and
the responsibility for the use and interpretation of these data is entirely that of the authors.
vii
     Note that income here includes capital gains as well as taxab le withdrawals fro m reg istered retirement savings plans
(RRSP).
viii
     Values for the >100,000 g roup were 5995 in 1992, 6100 in 1997 and 2001, and 5170 in 2007
ix
    The other money receipts which a family can spend include money given to individuals fro m other households,
winnings fro m lotteries, the liquidation of assets and inheritances.




                                                     - 21 -

				
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