Sales Taxation in Canada: The GST-HST-QST-RST 'System'

Abstract

For decades, the conventional view was that one could not impose a standard invoice-credit destination-based value added tax (VAT) at the subnational level of government. Canada's almost two decades of experience with just such a VAT demonstrates conclusively that this view is incorrect. Not only can it be done, but it has been done, and done well. Canadian experience also demonstrates that a federal VAT can work perfectly well in a country in which some subnational units have their own VATs, some have their own retail sales taxes (RSTs), and some have no sales tax at all. There is no apparent reason a similar system should not work equally well in the United States. In this paper, we discuss in detail the Canadian experience with two quite different types of subnational VATs - the Quebec Sales Tax (QST), a tax imposed on essentially the same base as Canada's federal VAT (the Goods and Services Tax, or GST) but administered by the provincial government, and the Harmonized Sales Tax (HST), essentially a provincial VAT imposed on the same base as the federal GST and administered by the federal government. The existence of these two different forms of provincial VAT raises neither technical nor economic problems for the federal VAT. On the other hand, the existence of a federal VAT has apparently spared Canada from many of the VAT evasion problems to which so much attention has been paid in the European Union, which of course does not have any equivalent 'union-wide' VAT to, as it were, shelter the VATs of member states. The evidence is that those provinces that have altered their sales taxes from RSTs to VATs have suffered no bad consequences and reaped some economic gains, so it is not surprising that Canada's largest province, Ontario, has recently announced that it will join the HST system, with some modifications, in 2010. Other provinces may soon follow. The adoption of a federal VAT in the U.S. might similarly induce states that wish to improve their sales taxes to follow a similar path.