Experts call for food tax

Billions at stake, economists say

OTTAWA – The two-decade old GST should be “overhauled” because governments are losing out on billions of dollars in potential revenue, says Jack Mintz, one of Canada’s leading economists.

“The GST is now one of the most inefficient value-added taxes in the developed world. It needs to be fixed,”said Mintz, former CEO of the C.D. Howe Institute.

Mintz supported the recommendations of Prof. Michael Smart of the University of Toronto who presented a paper on the “inefficiencies” of the GST Friday.

In the paper, published by the University of Calgary’s School of Public policy,smart proposed a consumer sales tax which, unlike the current GST, would be applied at the same rate to all goods and services, including those that are currently not taxed at all, or are taxed at a lower rate.

The uniform tax would mean that consumer decisions would be based upon the “true differences in economic costs” of each purchase, instead of the difference in tax rates, he said.

Canada is losing out on about $39 billion per year on the current GST system, Smart said, because it does not tax four key sectors: food and agricultural products, housing, certain public sector bodies such as education and health care, and small traders.

“The simple fact is that governments, both federal and provincial in Canada, are going to be making some tough decisions in the fiscal realm over the next few years,” Smart said.

“Here in the province of Ontario, the Drummond Report made that point clear to a lot of people that haven’t focused on it so far.”

The Drummond report, released last week, recommended that the Ontario government tighten its public-purse strings on a range of social services and education spending.

Smart said a uniform tax would bring in more revenue for governments and pay for social services.

With the upcoming federal and Ontario budget, the “economic reality” is that governments will have to talk about taxes, Smart said.

Compared to other OECD countries, Canada ranks 20th in terms of the efficiency of its value-added tax, meaning how much revenue it generates for the government.

Smart proposed that tax reform should consider removing the tax-free status of food, health care and education.

“I’m not saying it’s politically easy to do these things, I’m saying it’s economically sensible to do these things and I don’t think it’s impossible by any means,” he said.

Only three OECD countries do not tax food, Smart noted.

“The fiscal situation is such that we have to make a choice of dealing with our ‘sacred cows’ or dealing with our ‘sacred trusts,’” he said.

According to Smart, the cost of not taxing food represents $8 billion per year in lost revenue for the federal and provincial governments with value-added taxes.

Taxing food would likely hurt lower-income families who pay a larger share of their budget on food to a tune of about $1 billion in new taxes. However, there are ways of softening the blow by compensating lower- and middle-income families through increased low-income credits or a cut in the income-tax rate, Smart said.

Mintz agreed, saying “taxing food makes sense.”

Increasing low-income GST tax credits is an “absolute requirement” in any tax reform, said Mintz, the University of Calgary’s chair of the School of Public Policy.