Frances Woolley considers the merits of stealth taxation.
The federal GST or goods and services tax is a case in point. The GST is a value added tax. It replaced a particularly dysfunctional (small base, high rate) manufacturer’s sales tax. Almost all economists considered the GST superior to the old sales tax. However it was extremely unpopular among the general public. The reason is simple: the old manufacturer’s sales tax was invisible, so people couldn’t tell how much they were gaining when it was eliminated. The GST was visible, so people could see the increase in their tax liabilities. As a result, they over-estimated the net impact of the GST on their tax liabilities. (To be fair, people weren’t entirely stupid: manufacturers were slow to pass on the tax savings created by the elimination of the manufacturer’s sales tax.)
Rosen et al argue that “Most economists view the visibility of the GST [goods and services tax] as one of its beneficial characteristics.” The political opposition to the GST and now the HST (harmonized sales tax) should make “most economists” reconsider this view.
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