The benefits and drawbacks of implementing a new GST system

The common consumer would purchase a good or service and pay a sales tax. However, it is vastly unknown where this tax goes. In Ontario, the combined/harmonised sales tax (HST), is 13%, and consists of an 8% provincial sales tax (PST) which varies per province, and a 5% nationwide goods and services tax (GST), known as value added tax (VAT) worldwide. Although PST is required on every purchase, GST/VAT is only paid on non-essential products, and is exempt (zero-rated) for essential products and necessities such as produce, home supplies, education related expenses, and medicine (General Information for GST/HST Registrants). Similar systems exist in other places including the EU, where there is a zero rated VAT (0%), a reduced rate VAT (usually 5%), and a standard VAT (usually 20%) (VAT Rate in Germany). However, Canada is a relative outlier in having only 2 VAT rates, with other countries having at least three VAT rates to distinguish essential products, less essential products, and non-essential products. This essay will focus on whether or not the Canadian government, citizens, and business owners will benefit from varied GST rates, as well as the pros and cons of implementing such ideas.

To begin, varied VAT does not necessarily mean different VAT rates. Varied VAT could encompass many methods of taxation, however the most commonly thought of methods are different VAT rates, as mentioned earlier, and taxing the same or similar products with different VAT rates, which is most commonly used in the United States. In Maine, all berries are VAT exempt, except for blueberries. This is an attempt to capitalise on tourists who come to Maine just to try the regional specialty. New York and California demonstrate different VAT rates for the same products, with clothing and footwear over $110 being taxed in New York (TaxJar), and hot sandwiches being taxed, as opposed to cold sandwiches being zero rated in California (The Food Theorists). Multiple other states also have “sales tax holidays”, where certain products and services are exempt from tax for a set period of time. An example of this is school supplies being sold without sales tax around the beginning of the school year (TaxJar).

Having a varied GST system could benefit Canada in many ways. One of which is generating more revenue for the government. The United Kingdom makes approximately 86 billion pounds worth of VAT every two years, which is about CA$146 billion, or CA$2,168.42 per person. This is because of their standard, reduced, and zero rates of VAT (Crossley 194), which generates much more money, as Canada’s biennial GST revenue is approximately CA$156.86 per person (General Information for GST/HST Registrants). This means the U.K. raises about 13.8 times more revenue than Canada with three rates of VAT instead of two.

Studies also show that products with a reduced rate VAT are 1.2% more likely to be purchased than products with a standard or higher VAT rate, as most customers view it as a discount (Crossley 194). VAT would also be applied to every non-essential purchase, meaning the government could make millions of dollars every day.

Additionally, VAT is a fair tax. This is shown by the rich and the poor both paying the same tax, as VAT is based on the amount of money spent, not income. VAT will also be easier on the lower class, as the lower class would likely only buy essentials that would be exempt from VAT. VAT is also very transparent. Unlike income tax, VAT is very easy to calculate and understand. VAT is also likely to keep customers from buying unnecessary items, which could be better for mental health (Hodge).

A varied VAT system could not only benefit mental health, but also physical health, and the environment. Luxurious and fast food will likely have a high VAT, which could prevent customers from buying it, leading to healthier eating habits (The Food Theorists). Electronics are also likely to have a high VAT rate. Discouraging the purchase of electronics can boost mental health, as digital activities such as social media, excessive screen time, and video games have been proven to increase stress levels. Transportation methods such as cars, buses, etc. could also have a higher VAT , and because they could have negative effects on the environment, discouraging their sale can benefit the earth (Hiller). Low demand for unhealthy and polluting products would lead to low supply, which can benefit the environment long-term. However, discouraging spending could also have the disadvantage of the middle class boycotting less essential products, which will be touched on shortly.

On the contrary, varied VAT could have its drawbacks, which includes attacking the lower and middle class. Truly unessential could simply not be purchased, as they might not fit in the budget of the middle and lower class, especially the lower-middle class who might not be willing to pay extra money for products or services that they do not necessarily need. Lack of spending can also cause movement in the social class. For example, somebody in the upper-middle class who suddenly started spending less could move to the lower-middle class. This could cause a decline in GDP, which would contradict the previous point, of ‘VAT generating more government income’.

Varied VAT rates could also deny the lower class access to the middle class. According to the Institute for Fiscal Studies, the lower class usually spend the most on VAT. Even the lowest tier of poverty spends drastically more money than the second to lowest tier (Crossley 197). This could cause a sudden surge in the lower class, as hitting poverty could mean a point of no return.

Complications and confusions could also occur. If this new VAT system is implemented, there could be debate over which level of government would choose the rate of VAT, although it would likely be the federal government in Canada, as GST is a federal tax. There could also be debate over which VAT rate certain products would have, which could tamper with the governments’ decisions of setting VAT rates. Governments could hold elections which would cost vast amounts of money to organise and time waiting for results and trying to avoid skewed data and bias from customers and business owners, or governments could decide VAT rates on their own, which could cause customers and business owners to protest (General Information for GST/HST Registrants). It is extremely unlikely that the opinions for VAT rate will be consistent. While some products such as produce and essential home supplies could be unanimous, others such as communication related expenses and transportation can have very differing results (Hiller).

Additionally, there could be debate over which products and services fall under certain categories. For example, in 2020, there was a disagreement between the fast food chain - Subway, and the Irish supreme court. The Irish government ruled that Subway’s bread should be taxed as cake, because the weight of the sugar exceeded a certain percentage of the weight of the flour (The Food Theorists).

If varied VAT rates are implemented, customers might have a harder time shopping, as the average customer would likely not know the VAT rates of different products and services. Customers who pay in cash might not bring enough money and customers who are unaware of a product’s VAT rate may not realise a product is out of their budget (General Information for GST/HST Registrants).

Finally, varied VAT rates can make it harder to start and maintain a business by adding challenges and burdens such as higher cost and more responsibilities. When the new VAT system starts, some businesses might have to be temporarily suspended while their products’ VAT rates are being determined. Businesses that sell high rated products would have to lower their prices in order to keep customers. This could be difficult for businesses, as they are already likely trying to keep the prices of less essential goods and services down. 

Complicated VAT rates could make it take a longer time for entrepreneurs to start a business and could also scare them out of it. This could be detrimental to the economy and the idea of capitalism, as fewer businesses would be started, and some businesses could even shut down. Although varying VAT could take time and money to execute, once they are applied, they would be easy to maintain, so the most difficult step of starting a business would be the first.

Some businesses would also have to spend even more money on accountants, as it could be difficult for businesses to calculate and file VAT by themselves. This could also be viewed as a benefit for allowing more jobs. Businesses that might not afford accountants could resort to tax evasion. This would likely be a major problem, as many businesses in Canada are already trying to evade GST (General Information for GST/HST Registrants).

In my personal opinion, varied GST rates would not benefit Canada. Although they do offer the government more revenue, they also create complications for both the government, and citizens that could take months, or even years to overcome. And while it is healthy to abolish less essential products and services that have negative effects on people and the environment, the government has minimal right to tell citizens what they can and can not buy. A reduced rate VAT, might help the lower class, however the lower and middle class would likely start to lose money long-term. It is also worth noting that business owners will receive limited benefits.

All in all, a value added tax with multiple rates could benefit the government by generating extra revenue and slightly contribute to health and the environment. Controversially, it can complicate businesses and create more work for the government. Although such a system works elsewhere in the world, it is unlikely that Canada would benefit from a varied VAT system.