Question

Some years ago, the Federal government cut the GST (the federal sales tax on goods and services which Ontario later blended into the PST to create the HST) by two percentage points. The federal government could have transferred this cut to income taxes instead, i.e. it could have decreased taxes on income instead of on the GST. Sources of income that taxes are paid on include labour (work) as well as investment earnings. Assuming that taxes are to be cut, which tax cut do you believe is more beneficial for long run economic growth, a GST/HST reduction or an income tax reduction? Assume that either of the reductions would be revenue neutral, i.e., the federal government would forfeit the same amount of revenue with either tax that is cut. You are to use as many economic tools that you have learned in this course to justify your argument. You are quite welcome and encouraged to utilize outside sources. Please be sure to reference your sources. Assume that either of the tax cuts will result in the same decrease in revenues for the government. Your assignment should be at least 500 to about 750 words in length.
You are to back up your argument with sound economic reasoning and use concepts learned in this course. .
Please have this assignment completed and submitted before 11:59 on Wed. April 1 in order to avoid a late penalty. This assignment is worth 10% of your final mark. The late penalty will be 20% per day or part thereof that it is late. You should submit it through the assignment section in Blackboard. This is an individual assignment, i.e. you are to work independently on it

Answer 1

Answer

Taxes can be classified into direct and indirect tax. Direct tax means the tax is levied directly on your income & wealth, in short, your earnings. Indirect tax means the tax is levied on your income but in an indirect way (for easy understanding, your consumption of goods & services). So, the first difference is Income tax is a direct tax and GST is an indirect tax.

Income tax follows a progressive taxation structure i.e the tax rate increases with the increase in income. So, higher the income, higher the tax you will have to pay. GST follows regressive taxation structure i.e All the consumers equally bear the burden, irrespective of ability to pay. So higher the consumption, higher the tax you will have to pay.

You get a salary of $ 5,000/- and you pay income tax to the government. You go to a restaurant, eat whatever you want and pay the bill which consists of the price of your food and GST. However, in this case, you pay the total amount (price of your food and GST) to the restaurant owner and, in turn, he pays the GST amount mentioned on your bill to the government rather than you paying it directly. In short, income tax is payable in your capacity as individual and GST is payable in your capacity as consumer.

Thus, it is good that the government reduced the GST instead of the reducing income tax. This is because it will not cut down on the consumption of the public in general (including both rich and the poor). Higher income taxes will surely take major chunk of the income of the rich and would help government in providing benefits to the public at large. ( redistributive justice principle followed )