MODELING CHANGES TO THE CANADIAN GST

1
MODELING CHANGES TO THE CANADIAN GST

• Chantal Hicks and Jennifer Jones
• Statistics Canada
• IMA2007 Conference, Vienna August 20-22, 2007

2
The Goods and Services Tax (GST) in Canada

• Introduced in 1991
• Replaced a manufacturers sales tax
• A refundable GST credit was introduced to
  compensate for regressive impacts of the change
• GST rate of 7 on most goods and services
• Rate reduced to 6 in July, 2006

3
GST revenues grew faster than federal income
taxes or personal income
Source system of national accounts
4
Design of the GST credit in 1992
5
The lack of full indexation eroded the value of
the GST credit (up to 2000)
6
Question

• How generous is the GST and the GST credit in
  2007 compared to 1992?

7
The Social Policy Simulation Database and Model
(SPSD/M)

• Static microsimulation model of individuals and
  families in Canada
• Models income taxes, payroll taxes, commodity
  taxes, and most cash transfers
• 20 years of history with varied applications
• See www.statcan.ca/english/spsd for more
  information

8
Modeling the GST and other commodity taxes using
the SPSD/M

• An Input/Output model generates commodity tax
  rates as input to the microsimulation model
• 100 cost-push assumptions
• fixed consumption patterns
• produces effective sales tax rates
• Rates become parameters to SPSM which are applied
  to annual household expenditures

9
Average GST paid and credit received for families
(2002)
Source SPSD/M 14.2
10
Average family GST paid and credit received in
1992, by income group
11
Distribution of net GST by income group
Source SPSD/M 14.2
12
Average net GST paid by families, by income group
(2002)
Source SPSD/M 14.2
13
Distribution of families by income group
Source SPSD/M 14.2
14
Average net GST paid by families, by income
decile (2002)
Source SPSD/M 14.2
15
Three scenarios for 2007 Default GST rate
reduced to 6 and credit indexed starting in 2000
Source SPSD/M 14.2
16
Average change in net GST by income group under 3
scenarios in 2007
Source SPSD/M 14.2
17
Percentage of families who would have been better
off keeping the GST at 7 but with full
indexation of the credit
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Conclusion

• Families who made less than 35,000 paid similar
  amounts of GST, net of the credit, in 1992 and
  2007
• Had the credit been indexed in 1992 and the GST
  rate stayed the same, 43 of families would have
  been better off in 2007 than they were with the
  GST rate reduction

See www.statcan.ca/english/spsd for more
information on the SPSD/M