The federal Conservative Party grabbed the election spotlight yesterday by announcing that it would reduce the Goods and Services Tax to five per cent from seven per cent.

The Tories are obviously hoping to tap into taxpayer fatigue by not only proposing tax cuts but by focusing on the country’s most hated tax. There is little ambiguity regarding Canadians’ views on the GST; most abhor it. The visibility of the GST and the public loathing of it may make it a politically attractive target for tax relief but reducing it does not constitute smart economic policy.

There is little doubt now that Canadians will enjoy tax relief regardless of the party that assumes power after the election. The Liberals have proposed $30.3 billion in tax relief aimed mainly at lower-income Canadians. The Tories have countered with the call for a reduction in the GST.

We strongly agree with tax relief. The Organization for Economic Cooperation and Development expects Canadian governments to take 40.5 per cent of GDP this year in revenues. Canada remains above the United States (31.8 per cent) and the OECD average (37.6 per cent) and is not that much below the all-time high of 44.5 per cent collected in 1998.

In addition, Ottawa is flush with revenues. Even after announcing tax relief of $30.3 billion and additional new spending, the federal government still expects to collect $42.4 billion more in revenues than it spends over the next five years.

Agreement on the need for meaningful tax cuts does not result, unfortunately, in a consensus on which taxes to cut. Economists generally prefer to collect government revenues using consumption taxes like the GST rather than other more costly taxes, particularly business taxes. The reason is economic efficiency. That is, consumption taxes are much more efficient than other taxes like personal income taxes and capital-based or business taxes.

All of this is academic unless one translates efficiency into an understanding by average Canadians of the benefits of different types of tax cuts. For example, if we follow the Conservative plan to reduce the GST we would expect to see more spending as the reduction will make current consumption (spending) less expensive. That increased spending, however, will come at the expense of reduced savings.

The importance of savings and investment is critical to this debate. Savings leads to investment, which finances the purchase of machinery, equipment, new technologies, and research and development. These types of investments make workers more productive and ultimately result in higher wages and benefits for average workers. In fact, making these types of investment allows for higher levels of future consumption financed by increased income. In short, there are enormous benefits for society emanating from increased savings and investment.

Economic research has calculated the costs of these effects and consistently found that business taxes impose much higher costs on society than other taxes. The implication of which is that society benefits much more from reductions in these costly taxes than it does from reducing more efficient taxes like the GST.

The federal Department of Finance completed a study examining the costs of different types of tax cuts. The study concluded that for one dollar of revenue collected through corporate income taxes, the Canadian economy incurs an additional $1.55 in costs. This compares with an estimated cost of $0.17 for sales taxes. The benefits to society from improving incentives based on business tax relief significantly outweigh the benefits from the same amount of tax relief aimed at cuts to the GST.

If Canadians are interested in improving our economy, making workers more productive, increasing average incomes, and becoming more competitive, then it is critical that the country reduce taxes in a way that makes our tax system more efficient.

Specifically, we should be using consumption taxes like the GST more, not less, while reducing our use of costly and damaging taxes like business taxes and personal income taxes.