What’s Good About the GST Cut?

As of January 1 I’m supposed to start saving money as the GST has been dropped by 1%. Yet once I looked at our spending on what I actually get taxed on I realized it has to be one of the more useless tax cuts ever introduced in Canada for me.

You see all my major expenses don’t have the GST on them. My mortgage doesn’t have any GST, most of my food bill has no GST (I checked my last one I spend $2.62 in GST on a $210 food bill) and all my savings also doesn’t have any GST on it. So in the end I went through my monthly spending and I estimate that tax cut is going to save me a whole $10/month at best or a whole $120 a year for my family. O yes, I can finally retire a entire week earlier now.

To put this into perspective when the federal government dropped the lowest tax bracket rate from 15% to 15.5% each person would save about $140/year. Once you combine this with some of the other measures in the last year, such as the new child tax credit and increase to the basic exemption I’m saving around $1000/year on my family’s tax bill. Now that is a tax break in my mind.

So what good is dropping the GST? Well it can be useful tax cut if your buying a new house or car, since 1% on a large number is significant. Also if you are buying lots of consumer goods you would also do better with the tax cut.

Yet what really got me a little steamed about this cut is when I analyzed what this was encouraging in our country. In essence the government is rewarding people that spend a lot of money and then not giving a break to those that choose to save money instead or live a frugal lifestyle that doesn’t buy many new things. So in the end are they encouraging fiscal irresponsibility by lowering this tax? I think that perhaps they are. Let me know your thoughts.

17 thoughts on “What’s Good About the GST Cut?”

  1. That might not be bad news: if the government encourages spending that can help the economy; specifically the companies that sell those consumer goods (and cars). If you’re investing in consumer good companies they might see increased revenue because of this. Now we see if the opposite of trickle-down economics works…

  2. CD,
    Like you this recent tax cut is not going to save me a noticeable amount. This cut does not directly reward the fiscally responsible however, we may reap some benefit through the investment vehicles we own due to a more robust economy. However, my preference certainly would have been a cut in personal income taxes.

  3. I agree with you Tim. I would prefer our tax system to be completely changed to a consumption tax from an income tax, but I don’t think we’ll ever see it. With a consumption tax, I can control my tax bill with my spending choices. With an income tax, any additional income I make to try to get ahead is penalized…

    P.S. I know that neither tax system is perfect – but I’d like to try a consumption tax system.

  4. One other big reward the government gives the fiscally irresponsible……

    I went to visit my mom over the Christmas holidays. She lives in a small town. My younger sister and some extended family live there as well. Each and every one of them spend every last penny of their money on consumer goods. Zero cents in either short or long term savings.

    Yet when my sister and her bum (read doesn’t work and is in his forties and just had a baby with her) boyfriend turn 65 they will be able to retire comfortably (for them) with ZERO savings. Add up her CPP and the Guaranteed Income Supplement until OAS kicks in and they will be earning the same income as they do now.

    I’m not saying I would want their lifestyle but my husband recently made some observations. They have bought every single item that baby could possibly want or need in the next three years. Their countertops are covered with expensive convenience and junk foods (no generic brands either). They have more gadgets and gizmos and thingymajigs than I even knew about. High speed internet, satellite TV, call waiting etc etc.

    I am thrilled to know that the portion of my hard earned income that I do not save for the future or spend sensibly (because I have to part with it to taxes) is going to supplement the retirement income of people like my sister….. who choose not to save a cent…. because they don’t have to.

    I think that’s my rant for the month.

  5. I have never been very excited about the idea of the GST cuts (well, except for that fact that it will be easier to calculate in my head now 😉 ) but I hadn’t really thought through the reasons why. I think my lack of excitement was because of an intuitive understanding of what you have just laid out here, and I agree with you wholeheartedly.

    Of course, Middle Class Millionaire @3 makes a good point about the robust economy and the benefit to our investments.

    Another thing to consider is that with the recent strong dollar and consequent increase in cross-border shopping, the increase in domestic spending due to a GST reduction is probably a very good thing for those of us with anything invested in the Canadian economy.

  6. In a lot of places it’s not saving people *any* money. Just for a small example, there’s a pizza place near where I work. A bit over a year ago you could get a slice for 93 cents + tax. Total: $1. Last year they changed it to 94 cents plus tax. Guess what they just changed it to a few days ago.

    In this case it’s only pennies, but it’s an example of how prices don’t change at all for things where it’s desirable to have an even dollar amount as the final price. Pizza slices, concert tickets, whatever.

    I thought it was the most ridiculous thing ever when Stephen Harper said a 1% cut would save a family, earning $60k a year, $400. Who earns $60k and spends $40k on consumer goods!?

    And I don’t care much about a “robust economy” either. I think it’s silly to measure an economy solely in terms of money.

  7. Heh, Elaine that was my first thought too – that a lot of things will just get balanced up. I was vainly hoping for the one cent to the cities, although there was never much hope with this bunch.

  8. Excellent point Elaine; last year our maid service (don’t snort – huge sustainer of marital bliss in our house) suggested keeping the price the same and passing on the tax reduction as a wage increase to staff. Who wants to argue with that?

  9. Down in the states, presidential hopefull Huckabee is proposing a flat consumption sales tax (something like 30%), with no income or state taxes.

    I think the GST should have been increased, not decreased. It’s a political move that appeals to voters that don’t really understand finances. Consumption should be taxed while savings and investments should be encouraged.

    But I must admit, having bought a new condo when the first GST cut came in to play, the extra money back was quite nice.

  10. I am saving 2 cents a day on my Starbucks coffee. $3.84 a year. Woohoo.

    I’m sure I’ll be glad if I buy a new condo, but really? Would this not have been better spent on something else like, humm, I don’t know, health care? Infrastructure? Fighting poverty?

  11. LOL@Lise . . . after reading the article all I could think of was ‘today my teas was 1.54 instead of $1.55 . . . I’m RICH!’

  12. The worse thing about this tax “cut” was that the government recently admitted it doesn’t have enough money in the coffers to stimulate the economy in the event of a severe down-turn because less revenue coming in as a result of the tax cut. This means the GST cut robbed us of financial flexibility.

    I don’t know about you, I also got a notice in the mail promoting the cut from CRA. Way to spend my money responsibly.

  13. Sales taxes are a tax on the poor, the fact that they give a GST rebate is an outright admission of it. The rebate itself only covers the tax portion of those living a pauper lifestyle (ie Not Coleens sister!) all others (read most) pay a disproportion percentage of their incomes realative to the wealthy. Period.

    Huckabee’s Fairtax plan (Poli-speak) was founded by a group of extremely wealthy Texan lobbyists. While there are some positives in the plan it suffers a couple of fundamental failings:

    As always first sighted, the wealthy can only buy so many big screen TVs the rest is invested and their overall tax rate ends up being less. The spin argument here is that eventually someday the money will be spent and subjected at that point taxation. To be fair though then we should allow everyone to deffer their taxes until they are deceased – that should work….

    How does the government direct tax breaks at specific areas of the economy when incentives may be needed – ie how would you direct a tax break at the middle class?

    The plan simply isn’t realistic, Canadian cigarette smuglers can tell you why real quick. The tempatation and ease of tax evasion is pervasive. How do you stop a Florida statelite subscriber from cancelling Dishnet and buying Expressview with a creditcard on the web? It does not work unless your plan was really to replace the IRS with a monsterous organization that is going to monitor every fiscal transaction of every citizen in the country. Scary thought, Big Brother Anyone?

  14. Excellent points everyone. It’s good to hear I’m not the only one who thought the cut was a stupid idea.


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