Why taxing food staples should not be considered a policy option in Canada

Charge GST on food, economists say
The Canadian Press Posted: Feb 24, 2012 11:11 AM ET

Low-income households can’t buy food today with a larger HST rebate they hope to get sometime in the future.  A key objective of the social safety net, welfare, disability, unemployment, child tax, old age, guaranteed income and other benefits, is income smoothing.  It is why these payments are made bi-weekly or monthly.  Telling households already struggling to meet their basic needs that they will have to pay more at the point of sale, but that in turn they may receive a larger annual HST rebate undermines this key objective.  As it stands many of these social benefit programs have already seen significant real cuts as they have not been indexed to the cost of living.  Also, Canada does not have a  Supplemental Nutrition Assistance Program (aka ‘food stamps’) like the U.S. does.  Low-income Canadian households who won’t be able to make their weekly grocery budgets stretch a little further due to higher food staple prices will end up either at food banks, at soup kitchens or malnourished.

And that’s assuming an HST rebate will fully compensate the increased cost low-income households would bear. The current GST rebate does not fully offset its cost to lower-income households nor has it had an effect on the redistribution of income.  While tax hikes intended to more equitably distribute income should be zero-sum, like all tax schemes the HST on food will be designed to offset implementation costs  (admin, enforcement)  and limit benefits to net federal government income.

The argument that not taxing food staples adds to income disparity by needlessly subsidising the rich (high-income and/or wealth) is intellectually dishonest on at least two fronts. Food staples, which is what is at the heart of this argument since prepared foods and restaurant meals are already taxed, comprise a much smaller proportion of rich households’ budgets. The relative disbenefit of this ‘subsidy’ to the rich is negligible when contrasted to the food affordability benefit to lower-income households. See Text table 2 – Average expenditures by income level, 2009 (PDF file) on food as percentage of total expenditure by quintile from SHS, Adjusted market, total and after-tax income, by adjusted income quintiles, annual from SLID.

If the objective is to offset an unfair subsidy to the rich through the federal tax-and-transfer system, the goal would be more easily and efficiently achieved by taxing premium luxury goods consumed by rich households and their estates inheritance. High-end luxury goods also have a low demand elasticity: a potential exotic car or luxury home buyer will unlikely reconsider their purchase decision because they have to pay an extra 5-10% tax. And apparently the market for these goods remains exceptionally strong, fuelled by rising income/wealth disparity.  Likewise, an estate tax on the relatively few inheritances over say $1M would be more efficient, not to mention altruistic, than a tax that could affect relatively many low-income households’ food security.

Neither the estate tax idea nor the $1M amount are novel; they are from the Estate Tax administered by the IRS in the U.S.  The current Canadian tax code treats inherited assets as capital assets deemed disposed (for capital gains/losses/cost allowances) since  Canada’s estate tax was repealed back in 1972.  Nor is the luxury tax novel; see the Luxury Car Tax administered by the ATO in Australia or the 10% luxury car tax proposed by the U.S. EPA.  B.C used to have a provincial luxury car tax that was eliminated with introduction of the HST. Ontario has in place the means to  implement a luxury home tax through the HST on new property, although it may wish to reconsider extending it to resale homes and adjusting/varying the thresholds ($400K in Toronto today is average, not ‘luxury’).

In addition to inheritance and luxury consumption taxes, there are the popular arguments for raising Canada’s capital gains tax (and/or applying it all gains), reversing previous corporate income tax (CIT) rate cuts and eliminating tax-free savings accounts (TFSA).  While lower tax rates applied to investment income than those applied to salaries and wages do inherently benefit the rich, there are a number of issues that make these proposals more challenging to implement.  These include the need to keep the capital gains and CIT in line with prevailing U.S. rates and policies.  That said, the U.S. federal capital gains tax rate is higher (15-20% v 14.5%) and CIT rate significantly higher (35% v 15%) than Canada’s.

In addition to championing the idea of taxing food staples, Mr. Mintz is also known to expound the benefits of cutting federal CIT rates because they theoretically increase capital investment and create jobs. There is little real-world evidence to support the theory (see here). Mr. Mintz was asked if the objective of the continuous federal CIT rate cut (Excel file) was to increase capital investment and employment, whether it would not be more efficient to provide a ‘tax-cum-subsidy’ that would reward only those companies that invested and hired. This did not sit well with Mr. Mintz. While he looks favourably on giving low-income households an HST rebate after they have had to make sacrifices at the grocery store, he draws the line at rewarding rather profitable corporations with tax benefits after they have invested and hired in Canada. It is a rather peculiar double-standard. In any event, Mr. Mintz danced around the question by incoherently going on about capital flight in today’s more open international financial market system (given the amount of FDI going into Canada’s resource sector, one could argue capital controls would not be a bad idea).

To the point, the arguments in support of applying HST to food staples are as intellectually dishonest as those put forward in support of cutting taxes on profitable corporations.

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