Are Consumption Taxes Regressive in...

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canadian tax journal / revue fiscale canadienne (2011) 59:3, 463 - 93 463 Are Consumption Taxes Regressive in Quebec? Luc Godbout and Suzie St-Cerny* PRÉCIS Cette étude remet en question la présomption voulant que les taxes à la consommation — au Québec, la taxe sur les produits et services du gouvernement fédéral (TPS) et la taxe de vente du Québec (TVQ) — soient régressives. À l’aide de l’Enquête sur les dépenses des ménages de Statistique Canada, les auteurs analysent le panier de produits taxables et non taxables des ménages québécois pour chaque quintile de revenu. Leurs résultats montrent que sans les crédits pour TPS/TVQ, les taxes à la consommation sont pratiquement proportionnelles au revenu des ménages; toutefois, avec les crédits, le taux de taxe effectif augmente avec le revenu. Ainsi, les crédits de taxes constituent un outil plus efficace pour améliorer la progressivité des taxes à la consommation que la détaxation des produits alimentaires de base. Finalement, les résultats indiquent aussi que, à l’image de la réduction récente du taux de TPS, une augmentation du taux de TVQ, jumelée à des changements au crédit de TVQ remboursable, profite même aux ménages des quintiles de revenu les plus bas. ABSTRACT This study questions the presumption that consumption taxes—in Quebec, the federal goods and services tax (GST) and the Quebec sales tax (QST)—are regressive. Using Statistics Canada’s Survey of Household Spending, the authors identify the basket of taxable and non-taxable consumption of Quebec households for each income quintile. Their results show that without GST-QST credits, consumption taxes are almost proportional to household income; however, with these credits, the effective tax rate rises with income. By this measure, the tax credits are a more effective tool for improving the progressivity of consumption taxes than the zero-rating of basic groceries. Finally, the * Of Université de Sherbrooke, Quebec (e-mail: [email protected]; suzie.st-cerny@ usherbrooke.ca). We wish to thank François Drouin, of Université de Sherbrooke, who agreed to explore (as part of his research toward a master’s degree in taxation) the potential for analysis regarding the breakdown of consumption taxes using data from Statistics Canada’s Survey of Household Spending, and focusing in particular on effective tax rates. His work has confirmed the relevance of further analysis of the regressive nature of consumption taxes. The views and conclusions presented in this article remain, of course, entirely our responsibility.

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canadian tax journal / revue fiscale canadienne (2011) 59:3, 463 - 93

463

Are Consumption Taxes Regressive in Quebec?

Luc Godbout and Suzie St-Cerny*

P R É C I S

Cette étude remet en question la présomption voulant que les taxes à la consommation — au Québec, la taxe sur les produits et services du gouvernement fédéral (TPS) et la taxe de vente du Québec (TVQ) — soient régressives. À l’aide de l’Enquête sur les dépenses des ménages de Statistique Canada, les auteurs analysent le panier de produits taxables et non taxables des ménages québécois pour chaque quintile de revenu. Leurs résultats montrent que sans les crédits pour TPS/TVQ, les taxes à la consommation sont pratiquement proportionnelles au revenu des ménages; toutefois, avec les crédits, le taux de taxe effectif augmente avec le revenu. Ainsi, les crédits de taxes constituent un outil plus efficace pour améliorer la progressivité des taxes à la consommation que la détaxation des produits alimentaires de base. Finalement, les résultats indiquent aussi que, à l’image de la réduction récente du taux de TPS, une augmentation du taux de TVQ, jumelée à des changements au crédit de TVQ remboursable, profite même aux ménages des quintiles de revenu les plus bas.

A B S T R A C T

This study questions the presumption that consumption taxes—in Quebec, the federal goods and services tax (GST) and the Quebec sales tax (QST)—are regressive. Using Statistics Canada’s Survey of Household Spending, the authors identify the basket of taxable and non-taxable consumption of Quebec households for each income quintile. Their results show that without GST-QST credits, consumption taxes are almost proportional to household income; however, with these credits, the effective tax rate rises with income. By this measure, the tax credits are a more effective tool for improving the progressivity of consumption taxes than the zero-rating of basic groceries. Finally, the

* OfUniversitédeSherbrooke,Quebec(e-mail:[email protected];[email protected]).WewishtothankFrançoisDrouin,ofUniversitédeSherbrooke,whoagreedtoexplore(aspartofhisresearchtowardamaster’sdegreeintaxation)thepotentialforanalysisregardingthebreakdownofconsumptiontaxesusingdatafromStatisticsCanada’sSurveyofHouseholdSpending,andfocusinginparticularoneffectivetaxrates.Hisworkhasconfirmedtherelevanceoffurtheranalysisoftheregressivenatureofconsumptiontaxes.Theviewsandconclusionspresentedinthisarticleremain,ofcourse,entirelyourresponsibility.

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results also indicate that, like the recent reduction in the GST rate, increases in the QST rate, combined with changes to the refundable QST credit, benefit even households in the lowest income quintiles.

KEYWORDS: CONSUMPTION TAX n GST n QST n PROGRESSIVE TAXES n SALES TAXES n REGRESSIVE

C O N T E N T S

Background 464Consumption Taxes and Their Impact on Households 465

Consumption Taxes: The Current Situation 465The Fiscal Impact of Taxes 466The Regressive Aspect of Consumption Taxes 468Tools for Reducing or Eliminating the Regressive Effect of Consumption Taxes 471

Multiple Rates 471Exclusions 471Tax Credits or Allowances 472

Measures of Progressivity 474The Methodological Approach for Distributing the Weight of Consumption Taxes 476

Survey of Household Spending 476Household Type 477Measure of Household Income 477Breakdown of Households by Income 477Breakdown of Taxable Spending by Quintile 478Government Revenues Derived from the QST 480

The Survey of Labour and Income Dynamics 481Consumption Taxation of Households in 2008 482

Breakdown of Consumption Taxes 482Are Consumption Taxes in Quebec Truly Regressive? 483

Tax Concentration Curve 484Index of the Share of Taxes as a Proportion of the Share of Income 484Measurement of the Effective Consumption Tax Rate 486

Factors of Progressivity of Consumption Taxes in Quebec 486Impact of Changes to GST and QST Rates 488

The Reductions in the GST Rate in 2006 and 2008 489The Increases in the QST Rate in 2011 and 2012 489Changes in the Combined GST-QST Rate, 2005-2012 490

Conclusion 491

B ACKGRO UND

InQuebec,thefederalgoodsandservicestax(GST)andtheQuebecsalestax(QST)applytomostgoodsandservicesconsumed.

Despite existingoffsettingmeasures, suchas the zero-ratingor exemptionofcertainproductsandservicesandrefundableGST-QSTcredits,thereisanabidingnegativeimpressioninQuebec,asinCanadagenerally,regardingtheuseofcon-sumptiontaxes.AlthoughfewstudieshavedealtspecificallywiththissubjectsincetheimplementationoftheGSTandtheQST,thereisastronglyheldpublicpresumption

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regardingtheunfairnatureofconsumptiontaxes.Thisstudyaddressesaseriesofquestions:

n Arethesetwoconsumptiontaxesaregressiveformoftaxation?n Dotheoffsettingmeasureseliminatetheinherentregressivityofconsump-

tiontaxes?n Willthesituationbeexacerbatedbytherecentandexpectedchangestothe

GSTandtheQST?

TherecentandexpectedchangestotheQSTprovideatimelyopportunitytoundertakearigorousstudyoftherepercussionsofconsumptiontaxes,inordertodeterminewhetherornotthenegativeperceptionisjustified.

CO NSUMP TIO N TA X E S A ND THEIR IMPAC T O N HO USEHO LDS

Anessentialexerciseindevelopingfiscalpolicyconsistsofassessingtheimpactofconsumptiontaxesonhouseholdsaccordingtoincome.Thistypeofstudyattemptstoansweravarietyofquestions.Forinstance,whatwouldbetheresultofachangeintherelativeweightoftaxesonincomedistribution?1Putmoresimply,whopaysconsumptiontaxes?

Consumption Taxes: The Current Situation

TheGSTbecameeffectiveonJanuary1,1991,replacingthefederalmanufacturers’salestax.2Sincethen,sixprovinceshaveharmonizedwithit.Quebecwasthefirsttofollowthefederallead:onJuly1,1992,itreplaceditsretailsalestax,datingfrom1940,with theQuebec sales tax (QST).3Since1997, the federalgovernmenthascollectedaharmonizedsalestax(HST)inNewBrunswick,NovaScotia,andNew-foundland, in place of the GST and the provincial sales tax.Ontario and BritishColumbiahavealsoadoptedtheHST,effectiveJuly1,2010.4

1 See,forexample,GérardForgeotandChristopheStarzec,“L’impactredistributifdesimpôtsindirectsenFrance”(2003)13Public Economics3-43.

2 TheinitialGSTratewas7percent;ithassincebeenreduced,asdescribedbelow.SinceJuly1,1992,RevenuQuébechasadministeredtheGSTthroughoutQuebeconbehalfofthefederalgovernment.

3 TheinitialQSTrateswere4percentonservicesand8percentongoods.InMay1994,asinglerate,6.5percent,wasapplied,whichwassubsequentlyraisedto7.5percent,onJanuary1,1998,andto8.5percent,onJanuary1,2011.Furtherincreasesareplanned,asdescribedbelow.

4 TheHSTisdifferentineachprovince.ThecurrentHSTratesdifferinsomeprovinces(12percentinBritishColumbia;13percentinOntario,NewBrunswick,andNewfoundland;and15percentinNovaScotia).Thezero-ratedorexemptgoodsandservicesarealsodifferentinsomecases;forexample,children’scarseatsandcarboosterseatsareexemptfromtheprovincialportionoftheHSTinOntarioandBritishColumbia,butnotinNovaScotia.

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In2011,theGSTrateis5percentandtheQSTrate,8.5percent.However,theQSTappliestothetotalofthesalespriceandtheGST,resultinginacombinedsalestaxrateof13.93percentratherthan13.5percent.5SincetheGSTandtheQSTarevalue-addedtaxes,companiesthatcollectthetaxescanrecoverGSTandQSTthattheypaidontheirinputs.

In2007,consumersinQuebecpaid$7billioninGSTand$8.8billioninQSTontheirpurchasesofgoodsandservices.FortheQuebecgovernment,theQSTisthesecond-largestsourceofrevenueafterpersonalincometax,accountingfor22per-centofallitstaxrevenue.Forthefederalgovernment,theGSTgenerated15percentofitstaxrevenue,withroughlyone-fifthbeingcollectedinQuebec.6

TheGSTrateremainedunchangedat7percentfor15years.Thefederalgov-ernmentreducedtheratefrom7percentto6percentonJuly1,2006,andthento5percentonJanuary1,2008.Despitethelowerrate,theparametersoftherefund-ableGSTcreditforindividualswerenotchanged,meaningthatneithertheamountnorthereductionthresholdoftheGSTcredithasbeenreviseddownward.

InQuebec,thegovernmenthasannouncedaseriesofchangestotheQST.IntheMarch2009plantoreturntoabalancedbudget,thegovernmentannouncedthatthe QST rate (then 7.5 percent) would rise by 1 percentage point on January 1,2011.7Then,inthe2010-2011budget,thenewplantoreturntoabalancedbudgetannouncedanotherincreaseintheQSTrate,from8.5percentto9.5percent,totakeeffecton January1,2012.8Alongwitheachof these ratehikes, thegovernmentstipulatedanincreaseintherefundableQSTcredit.Itwasannouncedinthe2010-2011budgetthattherefundablecreditfortheQSTwouldbecombinedwithtwootherrefundabletaxcreditstoformthenewrefundablesolidaritytaxcredit.Thebudgetstatedthat,essentially,thisnewtaxcreditwillprovidemoreassistancetohouseholdstomitigateQST-relatedcosts.Sinceithas(sofar)beenpossibletoextracttheQSTcreditcomponentfromthesolidaritytaxcredit,wecanseethattheQSTcreditwillbeincreasedin2011and2012toreflecttheincreasesintheQSTrate.

The Fiscal Impact of Taxes

Studiesexaminingthebreakdownoftaxesfocusonthefiscalimpactoftaxation;inparticular,theymeasurethedistributionofalltaxeswithinthepopulation.9

5 Forexample,foraproductwitharetailpriceof$100,the5percentGSTis$5,andtheQSTiscalculatedonavalueof$105atarateof8.5percent,sothattheQSTpayableis$8.93.Thetotalofthetaxesisthus$5+$8.93=$13.93.

6 StatisticsCanada,CANSIMdatabase,tables284-0004and384-0007;InstitutdelastatistiqueduQuébec,Comptes économiques des revenus et dépenses du Québec,2009ed.(QuebecCity:InstitutdelastatistiqueduQuébec,2010);andFinancesQuébec,2010-2011Budget,BudgetPlan,March30,2010,atI.4.

7 FinancesQuébec,2009-2010Budget,BudgetPlan,March19,2009,atA.44-45.

8 FinancesQuébec,2010-2011Budget,AdditionalInformationontheBudgetaryMeasures,atA.9.

9 ForCanadainparticular,seeG.C.Ruggeri,D.VanWart,andR.Howard,“TheRedistributionalImpactofTaxationinCanada”(1994)42:2Canadian Tax Journal417-51;FrankVermaeten,

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Fiscalimpactstudiesgenerallymakeuseofmicrodata,andtheresultsarepres-entedbyincomegroupaccordingtohouseholdcategory.Insomecases,householdsareconvertedintoadultequivalentsusingequivalencescales.However,householdsremainacommonunitofobservationinstudiesoffiscalimpact.10

Whilemoststudiesuseannualdata,someattempttoestimateconsumptionandincomeoverthelifecycleinordertoavoiddistortionoftheresults.(Typically,inthefirstandlastyearsofadultlife,consumptionisproportionallyhigherinrelationtoannualincomethaninthemiddleofthelifecycle.)Thosewhofavourthelifecycleapproachmaintainthatannualincomeishighlyvariablefromoneyeartothenext,whileconsumptionismoreuniformovertheyears.Theyarguethatthelevelofconsumptionisabetterindicatorofwell-being,andthusthatusingincomeoveralifetimeispreferabletousingannualincomeforthepurposesofassessingfiscalpolicies.Theyalsorefertopermanentincometheoriesandindicatethatusingan-nual incomeexaggeratesmeasurementsofregressivityandprogressivityofmanytaxes.Ontheotherhand,themainargumentsofthosewhofavourusingannualincomeare,first,thatsimulatinganincomeseriesoveralifetimeisveryuncertain,givenalltheassumptionsthatmustbemade;second,thatbothtaxpayersandpolit-icaldecisionmakersaremoreinterestedinthetaxprofileoverashortperiod;andthird,thatfrequentchangesinfiscalpolicyprovideanotherreasonfortheuseofannualincome.

Theresultsoffiscal impactstudiesareveryoftenshownastheratiobetweentaxespaidandincomeforeachincomegroup,calledtheaverageeffectivetaxrate.However, the choice of income used also has an effect on the results obtained.Shouldonlymarketincome(wagesandothersourcesofincome)beused,excludinggovernmenttransfers?Orshouldthenotionoftotalincomebeused,whichincludestransfers and thus considers the share of income directly under the control ofhouseholdsthatthegovernmentcollectsintaxes?Isitpreferabletoapplytheno-tionofdisposableincome,whichreducestotalincomebytaxespaid?Lastly,shouldthedefinitionof incomebeexpandedto includeavalue imputedtogovernmentspendingongoodsandservices,giventhelargenumberofassumptionsconcerningthedistributionofthevalueofsuchgoodsandservices?

ThemainstudiesonthefiscalimpactoftaxesinCanadahaveanalyzedtheeffectofalltaxesofallordersofgovernment.11Theyhavealsopresentedtheresultsac-cordingtogovernmentandbytypeoftax.Themethodologyusedinthesestudiesis

W.IrwinGillespie,andArndtVermaeten,“TaxIncidenceinCanada”(1994)42:2Canadian Tax Journal348-416;andMarcLee,Eroding Tax Fairness: Tax Incidence in Canada, 1990-2005(Toronto:CanadianCentreforPolicyAlternatives,2007).

10 See,forexample,JonathanR.KesselmanandRonCheung,“TaxIncidence,Progressivity,andInequalityinCanada”(2004)52:3Canadian Tax Journal709-89.

11 Ruggerietal.,supranote9;Vermaetenetal.,supranote9;Lee,supranote9;andArndtVermaeten,W.IrwinGillespie,andFrankVermaeten,“WhoPaidtheTaxesinCanada,1951-1988?”(1995)21:3Canadian Public Policy317-43.

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similareventhoughthechoicesmaderegardingthetypeofincomeandtaximputa-tionassumptionsvary.Despitethesedifferences,theresultssupportoneanother,tovaryingdegrees,andcanbesummarizedasfollows:

n Overall,Canada’staxsystemisprogressiveandresultsinsubstantialincomeredistributioninfavouroflow-incomegroups.

n Thefederal tax structure ismoreprogressive than the tax structureof theprovincesasawhole,thelatterbeing,accordingtothestudies,morepropor-tionalormildlyprogressive.

n Thepersonalincometaxistheonlytrulyprogressivetax.n Localtaxesaresomewhatproportionalorslightlyregressive.n Taxesonconsumergoods(salestaxesandothertaxes)areregressive.n Overall, using income after government intervention (taxes and transfers)

wouldimprovetheresultsobtainedintermsofprogressivity(moreprogres-siveorlessregressive).

Using 1981 data, Payette and Vaillancourt12 examined the impact by incomeclass of government revenue and expenditure (federal, provincial, and local) forQuebec.Theyprovided adetaileddescriptionof theirmethodof imputationofgovernmenttaxesandexpenditure.Theirresultsshowedthatin1981,threetypesoftaxeshadaregressiveimpact:thetaxoncorporateprofits(accordingtotheim-putationassumptions,thistaxcanalsobeneutral);thepropertytax;andtaxesongoods(indirecttaxes,customsduties,excisetaxesandduties,registrationandlicencefees,etc.).Ontheotherhand,incometaxandsocialsecuritytaxeswereprogressive.Turningtotheimpactofpublicspending,transfershad,notsurprisingly,aclearlyprogressiveimpact.And,whenpopulationwaschosenastheallocatorofspendingamongquintilesformanyspendingcategories,theotherspendingcategorieswerealsoprogressive,withtheexceptionofthedebtandotherspendingcategory.Over-all,PayetteandVaillancourtshowedthatin1981,inQuebec,taxationwasmildlyregressiveandgovernmentspendingwasprogressive.

The Regressive Aspect of Consumption Taxes

Unlikeincometax,whichhasaprogressivetaxscale(theraterisesasincomein-creases),consumptiontaxeshaveasinglenon-zerorate.Twotaxpayers,onelow-incomeandtheotherhigh-income,willpaythesameamountofGST-QSTonthepurchaseofanidenticalproduct.

Inaddition,theresearchonfiscalimpactdiscussedaboveisconsistentwithoneof themaincriticismsoften levelledatconsumption taxes,namely, that theyareregressive—thatis,lower-incomefamiliesspendalargershareoftheirincomeintaxesthanhigher-incomefamilies.

12 MichelinePayetteandFrançoisVaillancourt,“L’incidencedesrecettesetdépensesgouvernementalesauQuébecen1981”(1986)62:3L’Actualité économique409-41.

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Someauthorshavewrittenonthisaspectofconsumptiontaxation.Anoverviewofthisliteraturetendstoconfirm,insomerespects,theregressivenatureofcon-sumptiontaxesspecificallyorofindirecttaxationingeneral.

InastudyoftheredistributiveimpactofindirecttaxesinFrance,ForgeotandStarzec13concludethatindirecttaxationhasananti-redistributiveeffectthatcontrib-utestotheheighteningofinequalities.RuizandTrannoy14presentamicrosimulationmodeloftheredistributiveimpactsofindirecttaxation.Themodelconfirmsandquantifiestheregressiveimpactofvariousindirecttaxes—inparticular,excisedutiesontobacco,alcohol,andpetroleumproducts.RuizandTrannoyconcludethatin-directtaxesmakebutamarginalcontributiontoredistributiveobjectives.Intheirview,indirecttaxationshouldbeconsideredasa“budgetreservoir”fromwhichgov-ernmentscandrawtofundreformsofdirecttaxeswitharealredistributiveimpact.

Usingamicrosimulationmodel,Decosteretal.15 simulatea shift fromdirecttaxationtogreateruseofindirecttaxationinfiveEuropeancountries,keepinggov-ernmentrevenuesconstant.Thestudyshowsthattheregressiveaspectdependsonthedenominatorused.Iftheamountofindirecttaxespaidiscomparedasapro-portion of income, these taxes are regressive, but they are proportional or evenprogressiveasapercentageoftotalconsumptionspending.However,theyarestilllessprogressivethanotherformsoftaxation,suchastaxationofindividualorfamilyincome.

Asindicatedaboveinthesectiononfiscalimpact,manyauthorsarguethattheprogressiveorregressivenatureofindirecttaxesshouldbemeasured,notonthebasisof annual income, but rather using life cycle income. Caspersen and Metcalf,16Metcalf,17 and Athreya and Reilly18 have all shown that consumption taxes areregressiveonthebasisofannualincome,butbecomeproportionalorevenprogres-sivewhenthecalculationisbasedonlifecycle.Ontheotherhand,ChernickandReschovsky19contradicttheforegoingstudiesandaffirmthatconsumptiontaxesarealwaysregressive,regardlessofthetimehorizonconsidered.

13 Supranote1.

14 NicolasRuizandAlainTrannoy,“Lecaractèrerégressifdestaxesindirectes:lesenseignementsd’unmodèledemicrosimulation”(2008)413Économie et statistique21-46.

15 AndréDecoster,JasonLoughrey,CathalO’Donoghue,andDirkVerwerft,“HowRegressiveAreIndirectTaxes?AMicrosimulationAnalysisforFiveEuropeanCountries”(2010)29:2Journal of Policy Analysis and Management326-50.

16 ErikCaspersenandGilbertMetcalf,“IsaValueAddedTaxProgressive?AnnualVersusLifetimeIncidenceMeasures”(1994)47:4National Tax Journal731-46.

17 GilbertE.Metcalf,The National Sales Tax: Who Bears the Burden?CatoInstitutePolicyAnalysisno.289(Washington,DC:CatoInstitute,1997).

18 KartikB.AthreyaandDevinReilly,“ConsumptionSmoothingandtheMeasuredRegressivityofConsumptionTaxes”(2009)95:1Economic Quarterly75-100.

19 HowardChernickandAndrewReschovsky,“Yes!ConsumptionTaxesAreRegressive”(2000)43:5Challenge Magazine60-91.

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TurningtoCanada,ina1978study,Ruggeri20maintainedthatthedifferentem-piricalresultsfoundforCanadainvariousstudiesonconsumptiontaxescouldbeexplainedinpartbydifferencesinthedefinitionofincome(beforeoraftergovern-mentinterventionbytaxesandtransfers)andinthemethodofallocationofpaymentsoftaxesforthevariousincomegroups.Usingincomeaftertaxesandtransfers(aftergovernment intervention) and breaking down household spending according toStatisticsCanada’s1969surveyoffamilyexpenditures,21heconcludedthatprovin-cialsalestaxeswereproportional.

In Quebec, Vaillancourt and Berthiaume22 examined Quebec’s retail sales taxcomparedwithOntario’staxin1970foreconomicfamiliesaccordingto12incomegroups.TheyconcludedthatthesalestaxwasclearlyregressiveforallincomegroupsinOntario,butthatinQuebec,itwasroughlyproportionalinthefirst10groups,representing85percentoffamilies.VaillancourtandPoulaert23thenrepeatedtheexercise,butforalltheprovincesandfortwoyears,namely,1978and1982.Inthiscase, their resultsmeasured for aCanadianweighted average showed that retailsalestaxesweresomewhatprogressivein1978andregressivein1982.ThisresultalsoheldforQuebec,thoughwhenthelastincomegroupwasexcludedin1982,adegreeofproportionalitywasapparent,oratleastregressivitywasfairlylow.

However,itshouldbementionedthatthereisnostudydealingspecificallywiththeGSTortheQST.InthestudiesmentionedearlierontheCanadiantaxsystemasawhole,theeffectofconsumptiontaxesonincomehasbeenmeasured,butineverycase,eithervalue-addedtaxes(GST,QST)hadnotbeenimplemented,ortheywereincludedintheentiresetofindirecttaxes.Nonetheless,itisimportanttopointoutthatVermaetenetal.24indicatethattheregressiveaspectofindirecttaxesremainsdespitetheexistenceoftaxcredits,whileLee25specifiesthathiscalculationscon-cerningindirecttaxesdonottakethetaxcreditintoaccount,becauseheconsidersittobeatransferandthusincludesitinincome.However,headdsthatthiscreditoffsetstheregressiveaspectoftheGST.

Onemightask:Ifaspecificanalysisofconsumptiontaxes,eventakingintoaccountexistingtaxcredits,showsthattheyareregressive,isthatcauseforconcernsolongas the tax system as a whole remains progressive? As Chernick and Reschovsky

20 G.C.Ruggeri,“OntheRegressivityofProvincialSalesTaxationinCanada”(1978)4:3Canadian Public Policy364-72.

21 StatisticsCanada,Family Expenditures in Canada,catalogueno.62-535(Ottawa:StatisticsCanada,1969).

22 FrançoisVaillancourtandJacquesBerthiaume,“AComparativeAnalysisoftheIncidenceofRetailSalesTaxinOntarioandQuebec,1970”(1978)26:5Canadian Tax Journal596-604.

23 FrançoisVaillancourtandMarie-FrancePoulaert,“TheIncidenceofProvincialSalesTaxesinCanada,1978and1982”(1985)33:3Canadian Tax Journal490-510.

24 Vermaetenetal.,supranote9.

25 Lee,supranote9.

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observe,26theessentialthingistoensurethatthelesswelloffdonotbecomemoredisadvantagedwhenachangeinfiscalpolicyisimplemented.

Tools for Reducing or Eliminating the Regressive Effect of Consumption Taxes

Whileconsumptiontaxestendtoberegressivebynature,governmentcanintervenetoreduceorcompletelyoffset theirregressiveeffect.27Thethreemostcommonways toreduceregressivity for low-incomehouseholdsaremultiplerates,exclu-sions,andtaxcreditsorallowances.28

Multiple RatesImplementingmultiplerates,withlowerratesappliedtoeverydaygoodsandser-vicesandhigherratesappliedto“luxury”goodsandservices,obviouslyreducestheregressivenatureofconsumptiontaxes.Ofthe27memberstatesoftheEuropeanCommunity,Denmarkistheonlyonetouseasinglevalue-addedtaxrate.France,forexample,appliesratesof2.1percent,5.5percent,and19.6percent.29

Inthisregard,Bickley30indicatesthateconomistsopposemultipleratesbecauseoftheadministrativecoststheygenerateandtheireffectsontheneutralityofthetax.

NeitherQuebecnorCanadahasadoptedthisapproach,andbothapplyasingleconsumptiontaxrate.

ExclusionsThe regressive nature of consumption taxes obviously depends on the tax base.Oncecertaingoodsorservicesareexemptfromtax,itispossibletoreduceorelim-inate regressivity by excluding goods whose consumption represents a relativelylargershareofexpendituresbylower-incomehouseholds.Thiscanbedonebyex-cludingessentialgoods(foodandshelter,inparticular).

26 ChernickandReschovsky,supranote19.

27 Manyauthorsspeakofthepossibilityofreducingorcancellingtheregressiveaspect.See,inparticular,JeffreyM.Schaefer,“SalesTaxRegressivityUnderAlternativeTaxBasesandIncomeConcepts”(1969)22:4National Tax Journal516-27;Metcalf,supranote17;andKentOsburnZirlott,“AnalyzingSalesTaxRegressivityUsingConsumerExpenditureData:AThreeScenarioAnalysisforAlabama,”PhDdissertation(UniversityofAlabama,2007).

28 JamesM.Bickley,Value Added Tax: Concepts, Policy Issues, and OECD Experiences(Hauppauge,NY:Novinka,2003).

29 EuropeanCommission,TaxationandCustomsUnion,VAT Rates Applied in the Member States of the European Union(Brussels:EuropeanCommission,2011).

30 Supranote28.

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Forthesamereasonsmentionedfortheuseofmultiplerates,Bickleypointsoutthateconomistscriticizetheuseofexclusions.However,Schaefer31andDavies32haveshownthatexcludingfoodpurchasedforhomeconsumption(basicgroceries)fromthetaxbasecanreduceregressivityorincreaseprogressivity,dependingonthemeasureused.

QuebecandCanadausetheexclusionapproach.Manygoodsandservicesareeitherexemptorzero-rated(fortheQST,theGST,orboth).33Fromtheconsumer’sstandpoint,“exempt”and“zero-rated”meanthesamething—namely,applicationofazeroratetoagivenproductorservice—butforabusiness,theimpactdependsonwhichformofexclusionapplies.34Thereisamultitudeofexemptorzero-ratedgoods and services, including prescription drugs, certain transportation services,mosthealthservices,educationservices,andchild-careservices,aswellascertainspecificgoods(suchasdiapersandbooks)intheQSTsystem.

Obviously, shelter and basic groceries must be added to that list. Regardingshelter,thegovernmentacknowledgesthatitisanessentialneedandamajorcom-ponentofhouseholdconsumption.Asforgroceries,thegovernmentacknowledgesthegeneralviewamongtaxpayersthatbasicgroceriesshouldnotbetaxed.Inbothcases,thesemeasureswereincludedinrecognitionofthenegativeconsequencesofataxonrentalaccommodationandbasicgroceriesforlow-incometaxpayers.35

Tax Credits or AllowancesThethirdapproachdesignedtoattenuatetheeffectsofconsumptiontaxesforlow-incomehouseholdsistheintroductionoftransfermeasuresdirectedtothisgroupoftaxpayers.Thistypeofallowancecanconsistofataxcreditclaimedwhenfilinganannualtaxreturn,oraperiodicbenefit.Avariantofthisapproachistoallocateade-finedportionofconsumptiontaxrevenuestotransferstolow-incomehouseholds.

Bysimulating the implementationofa sales taxwitha taxcreditoruniversalrebate, Zirlott36 (for Alabama) and Burton and Mastromarco37 (for the United

31 Schaefer,supranote27.

32 DavidG.Davies,“ClothingExemptionsandSalesTaxRegressivity:Note”(1971)61:1The American Economic Review187-89.

33 Forexample,asdiscussedbelow,53percentofhouseholds’currentexpenditureinthelowestincomequintilehasnotbeentaxed.Theproportiondecreasesasincomeincreases,reaching33percentforthehighestincomequintile.

34 Thedifferenceisimportantforcompaniesthatmayormaynotclaiminputtaxrebatesorcreditsdependingonwhetherthesupplyiszero-ratedorexempt.

35 FinancesQuébec,Tax Expenditures: 2010 Edition(QuebecCity:FinancesQuébec,2011),atB.227-30.

36 Zirlott,supranote27.

37 DavidR.BurtonandDanR.Mastromarco,Emancipating America from the Income Tax: How a National Sales Tax Would Work,CatoInstitutePolicyAnalysisno.272(Washington,DC:CatoInstitute,1997).

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States)haveshownthatconsumptiontaxescanbecomeprogressiveforlow-incomeearners.

UnlikeEuropeancountries,whichdonotusethisapproach,QuebecandCanadahaveofferedthetaxcreditsincetheintroductionoftheGSTandtheQST.38Thefederal and Quebec governments allow individuals a refundable sales tax credit,dependingontheireconomicandfamilysituation.In1989,Canada’sministeroffinance,MichaelH.Wilson,wrote:

Canadaisinauniqueposition:ourextensiveexperiencewithrefundabletaxcreditsdeliveredthroughtheincometaxsystemensuresthatwewillbeabletooffsetthere-gressivitythatisinherentintaxingconsumption.39

Table 1 shows the parameters of the GST and QST refundable tax credits for2008,whilefigure1illustratestheamountsreceivedforacouplewithchildren.Itcanbeseenthattheamountobtainedvarieswidelydependingonfamilysituationandincome.However,onlythevalueofthefederalcreditdependsonthenumberofchildren.

Ifaconsumptiontaxthatisapplieduniformly(atthesamerateonallproductsandservices,regardlessofhouseholdsituation)imposesaheavierburdenonhouse-holdsthatarelesswelloff,threetoolscanbeusedtoreduceorreversetheregressiveimpactofthetax.QuebecandCanadamakeuseoftwoofthesetools—theexclusionofcertainbasicgoodsandservicesfromthetaxbase,andtheprovisionoftaxcreditsforhouseholdsthatarelesswelloff—bothofwhichclearlyaffectthedistributionoftheconsumptiontaxburdenamonghouseholds.Thatsaid,implementationofthesemeasuresmustbeoffsetfinanciallybyapplyingahighergeneralsalestaxrateifthegovernmentistomaintaintherevenuesitneedsfromtheimpositionofaconsump-tiontax.

Adocumentpublishedin1987bythefederalDepartmentofFinance,beforetheimplementationoftheGST,showedthatasalestaxwithoutarefundabletaxcreditwouldberegressive,butasalestaxwitharefundablecreditandsomeexemptionswouldbeprogressive.40

Itmaybeworthwhilenotonlytoexaminewhetherconsumptiontaxesarere-gressiveornot,andthushowtaxesarecollected,butalsotostudyhowgovernmentsusetaxrevenuesforpublicspending.Asdiscussedabove,refundablesalestaxcredits

38 InNewZealand,thereisasalestaxcredit,butitisrestrictedtofamilieswithdependentchildren.SeeIanDickinsonandDavidWhite,Tax Design Insights from the New Zealand Goods and Services Tax (GST) Model(Wellington,NZ:VictoriaUniversity,CentreforAccounting,GovernanceandTaxationResearchSchoolofAccountingandCommercialLaw,2008),at11.

39 Canada,DepartmentofFinance,Goods and Services Tax: An Overview(Ottawa:DepartmentofFinance,1989),at6.

40 Canada,DepartmentofFinance,Tax Reform 1987: Sales Tax Reform(Ottawa:DepartmentofFinance,1987),at13.

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474 n canadian tax journal / revue fiscale canadienne (2011) 59:3

TABLE 1 Parameters of Refundable Tax Credits for the QST and GST, 2008

Maximum Reduction Rateof Cutoff amount threshold reduction threshold

dollars percent dollars

QSTSingleperson..................... 292 29,645 3 40,379Couple. . . . . . . . . . . . . . . . . . . . . . . . . . 348 29,645 3 43,245

GSTPersonlivingalone(including

workincomesupplement)a . . . . . . . . . 369 31,524 5 38,904Single-parentfamilywithonechild . . . 611 31,524 5 43,744Childlesscouple. . . . . . . . . . . . . . . . . . . 484 31,524 5 41,204Couplewithchildren

Onechild. . . . . . . . . . . . . . . . . . . . . 611 31,524 5 43,744Twochildren . . . . . . . . . . . . . . . . . . 738 31,524 5 46,284

Notes:TheamountsofGSTandQSTcreditsareindexedannually.ThecutoffthresholdfortheQSTcreditiscalculatedbyincludingthedeductionforworkersfrom$1,000perperson.

a Themaximumamountis$242,butthereisasupplementforapersonlivingalonewithaworkincomesupplement.Themaximumsupplementis$127andappliestoworkincomeinexcessof$7,851atarateof2percent.Accordingly,themaximumamountof$369isreachedatworkincomeof$14,200.Sources:CanadaRevenueAgencyandRevenuQuébec.

areinplacetoreducetheregressivenatureoftheGSTandtheQST,andmanyecono-mistsagreethatmostwealthredistributionoccursonthespendingside,andnotjustinhowtaxrevenuesarecollected.41

Measures of Progressivity

Therearenumerousmeasuresofprogressivity,althoughnoindicatorisuniversallyrecognized.42However,measuresofprogressivityaregenerallyoftwotypes:targetedorglobal.Atargetedmeasureofprogressivityiscalculatedforvariousspecifiedin-comegroupsandassistscomparisonofresultsfromonegrouptoanother.

Theaverageeffectivetaxrateisalocalmeasure.Ina1948study,MusgraveandThin43measuredtheriseinthisratebythechangeintaxpayablecomparedwiththechangeinincome.Thereisprogressivitywhentheaveragetaxrateisarisingfunc-tionofincome.Thistypeoflocalmeasureisextremelyuseful,eventhoughitmakes

41 BevDahlby,“RestructuringtheCanadianTaxSystembyChangingtheMixofDirectandIndirectTaxes,”inHerbertG.Grubel,Tax Reform in Canada: Our Path to Greater Prosperity(Vancouver:FraserInstitute,2003).

42 JohnNorregaard,“Progressivitédessystèmesd’impositionsurlerevenu”(Autumn1990)Revue économique de l’OCDE91-123.

43 RichardA.MusgraveandTunThin,“IncomeTaxProgression:1929-1948”(1948)56Journal of Political Economy498-514.

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are consumption taxes regressive in quebec? n 475

FIGURE 1 Annual QST and GST Credits by Family Income for a Couple with Two Children, 2010

Dol

lars

Family income (dollars)

Source: Calculations by the authors.

0

200

400

600

800

1,000

1,200

Total creditsQST credit GST credit

75,

000

70,0

00

65,0

00

60,0

00

55,0

00

50,0

00

45,0

00

40,0

00

35,0

00

30,0

00

25,0

00

20,0

00

15,0

00

10,0

00

5,00

00

comparisonsbetweenjurisdictions,overtime,orbetweentwotypesoftaxationmoredifficultthanaglobalmeasure.(Aglobalmeasureanalyzestheoverallprogressivityorregressivityofataxstructure.)

Inadditiontotheaverageeffectivetaxrate,thereareothertargetedmeasures,includingaverysimpleoneproposedbyRuggeri.44Heanalyzedprogressivitybycomparingtheproportionoftotaltaxespaidbyhouseholdsinonequintilewiththeshareoftotalincomeofthesamequintile.Ifthetaxisdistributedproportionally,theindexwillbeequalto1.Morethan1forthelowerquintilesmeansthatthetaxisregressive,becausetheshareoftaxpaidbyhouseholdsinthelower-incomequintilesishigherthantheirshareofincome.AccordingtoRuggeri’sapproach,thetaxisprogressivewhentheindexforthelowerquintilesislessthan1whiletheindexfortheupperquintilesisgreaterthan1.

Foraglobalanalysisofprogressivity,aLorenzcurveanda taxconcentrationcurvecanbedrawnsidebyside.TheLorenzcurveshowsaggregatepopulationasa function of aggregate income. The tax concentration curve shows aggregatepopulationasafunctionofaggregatetaxespaid.Accordingly,ataxisprogressiveifat eachpointof aggregatepopulation (except atboth ends) theLorenz curve is

44 Ruggeri,supranote20.

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abovethetaxconcentrationcurve,implyingthatthepercentageofthepopulationinquestionispayinglessthanitsshareofincome.45

THE ME THO D O LO GIC A L A PPROACH FO R DIS TRIBUTING THE WEIGHT O F CO NSUMP TIO N TA X E S

ThemainobjectiveofthisanalysisistoestimatethedistributionofconsumptiontaxesamongQuebechouseholds.Todoso,theamountofconsumptiontaxespaidbyhouseholdsmustfirstbedetermined.Itwillthenbepossibletodeterminetheirweightasaproportionofhouseholdincome.Thissectiondescribesthemethodo-logicalapproachused.

Survey of Household Spending

TheanalysismakesuseofStatisticsCanada’sSurveyofHouseholdSpending(SHS)for200846toestimateconsumptiontaxespaidinQuebec(QSTandGST).TheSHSprovidesdetailedinformationonspendingrelatingtoconsumptionofproductsandservicesbyhouseholdsineachprovinceofCanada.Householdspendingisbrokendownintomorethan260categories,withmanygroupings.Thesurveyalsogivestotal income, taxes paid, and the main social contributions paid by these samehouseholds.Themaingroupingsofconsumptionspendingin2008areasfollows:

n Foodn Sheltern Householdoperationn Householdfurnishingsandequipmentn Clothingn Transportationn Healthcaren Personalcaren Recreationn Readingmaterialsandotherprintedmattern Educationn Tobaccoproductsandalcoholicbeveragesn Gamesofchance(net)n Miscellaneousexpendituresn Investmentsinthehome:improvementsandalterations

45 Inparticular,Zirlott,supranote27;AbdelkrimAraar,SamiBibi,andJean-YvesDuclos,“Progressivity,VerticalandHorizontalEquity,”paperpresentedattheWorkshoponPovertyandSocialImpactAnalysisinSub-SaharanAfrica,Kampala,Uganda,November23-29,2009.

46 StatisticsCanada,Survey of Household Spending, 2008(Ottawa:StatisticsCanada,2009).

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Household TypeInthisanalysis,wewillusespendingbyhouseholdsratherthanspendingbyindivid-uals.47IntheSHS,ahouseholdisapersonorgroupofpersonsoccupyingadwelling.Accordingly,householdsconsistofcoupleswithorwithoutchildren,single-parentfamilies,andpersonslivingaloneorwithotherunrelatedpersons.AccordingtotheSHS,therewere3,351,040householdsinQuebecin2008.

Measure of Household IncomeHouseholdincomecanbemeasuredinmanyways.Forinstance,marketincomein-cludesallsourcesofhouseholdincomeexceptgovernmenttransfersandiscalculatedbeforetaxes.Total incomeincludesall sourcesof income, includinggovernmenttransfers.Lastly,after-taxincomeincludesallsourcesofincome,includinggovern-menttransfers,fromwhichincometaxissubtracted.

Tomeasuretheamountoftaxespaidbyhouseholdsasaproportionoftheirin-come,theanalysisusesthenotionofnetincome,definedasincomeafterpersonalincometaxesandaftersocialcontributions.AllthisinformationisdrawnfromtheSHS2008.48Netincomeisselectedforthisanalysisbecauseitistheincomeactuallyavailabletohouseholdsforconsumptionspending.

Breakdown of Households by IncomeTheSHSpresentshouseholdspendingbyincomequintile,meaningthattheSHSdataforthe3,351,040householdsaredividedintofiveequalgroups.Accordingly,theanalysiscantakeintoaccountthechangeinconsumptionaccordingtohouse-holdfamilyincome.Thefirstquintilereferstothegroupof670,210householdswiththelowestincome,whilethefifthquintilereferstospendingbythegroupof670,210householdswiththehighestincome.49In2008,thepopulationbreakdownresultsinthefollowingtotalincomethresholdsfortherespectivequintiles:

47 Itcanbearguedthathouseholdsizeshouldbetakenintoaccount.Forexample,theindividualsinafamilyoffourearning$20,000peryearmightbepoorerthanasingleindividualearning$15,000.Implementingthisapproachwouldinvolvecalculatinghouseholdincomeonaper-adult-equivalentbasis(usingahouseholdequivalencescaletoequivalizehouseholdsofdifferentsizes)andthenrerankinghouseholdsintofivequintilesonthisbasis.Thisstepislefttofurtherresearch.Ourapproach,althoughnotusedbyallstudies,iscommonintheliterature;asKesselmanandCheung,supranote10,at735,note,“[t]akingthehouseholdastheunitofobservationwithoutequivalizingisalsocommoninFINC[fiscalincidence]studies.”

48 NetincomeasdefinedintheSHS2008alsoincludes“othermoneyreceipts,”whichreferstoreceiptsnototherwiseincludedinincome,suchascashgifts,inheritance,orlifeinsurancesettlements.Winningsfromgamesofchancearealsoincludediftheyexceedtheamountspentongamesofchance.Forsimplicity,weusethisnetincomeconcept.

49 Formethodologicalquestions,thetotalofthehouseholdsofthesampleis10lessthantheadditionofthenumberofhouseholdsofeachquintile.Formoreinformation,seeStatisticsCanada,User Guide for the Survey of Household Spending, 2008,catalogueno.62FOO26M,at21.

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478 n canadian tax journal / revue fiscale canadienne (2011) 59:3

1. First(lowest)quintile:$22,354orless 2. Secondquintile:$23,355-$39,143 3. Thirdquintile:$39,144-$61,389 4. Fourthquintile:$61,390-$94,700 5. Fifth(highest)quintile:$94,701ormore

Breakdown of Taxable Spending by QuintileTomeasuretheQSTandGSTpaidbyhouseholds,eachofthe260spendingcategor-iesoftheSHS2008wasanalyzedtodeterminewhetherornotitconsistedoftaxablegoodsandservices.50Table2showsthebreakdownoftaxableandnon-taxablespend-ingbyQuebechouseholdsineachquintilein2008,foreachofthemainconsumptiongroupingslistedabove.

ThelevelofdetailintheSHS2008,whilestilltoocoarse,isnonethelessadequatefor estimating taxable household consumption. To clarify how the taxable itemsweredetermined,thetextthatfollowsprovidesanexplanationofsomeofthemajorspendingitems,especiallythosethatrequiredalargernumberofmanipulations.

Spending on Food

Thesizeofhouseholdincomecertainlyhasaninfluenceontheproportionofthefamilybudgetallocatedtobasicnecessities,suchasfood.In2008,forhouseholdsinthelowestquintile,almost19percentoftotalspendingwasonfood,comparedwith9.5percentforhouseholdsinthehighestquintile—hence,theimportanceinthisstudyofestimatingthetaxableportionofsuchspending.Thetwomaincompon-entsoftheSHSinthefoodcategoryarefoodboughtinastoreandfoodboughtinarestaurant.Ofcourse,taxesarepaidonfoodboughtinarestaurant.However,forfoodboughtinastore,thetaxableandnon-taxableportionsmustbeestimated.

Quebec’s tax expenditures report indicates that in 2008, zero-rating of basicgroceriescost$1.2billioninforgoneQSTrevenue,51whichimpliestotalhouseholdspendingonnon-taxableproductsestimatedat$15.5billion.Themethodweusetocalculatethetaxableandnon-taxableportionsoffoodproductsboughtinastoreisshownbelow.AddingupthedatafromtheSHS2008forallquintiles,totalhouse-holdspendingonfoodboughtinastoreamountedto$20billion.Usingthisfigure,itispossibletoestimatethenon-taxableportionofspendingonfoodboughtinastorein2008at77.2percent.Tosimplifymatters,andbecausenothingallowsustoestimatevariationsbetweenhouseholds in spendingon food,whether taxableornot,thisproportionisappliedevenlytohouseholdsineachquintile,toarriveatthefiguresshownfor“Food”intable2.

50 Formoredetailsaboutthebreakdownoftaxableandnon-taxablespendinginthisarticle,e-maileitheroftheauthorsorcontacttheCanadianTaxFoundationlibrary(www.ctf.ca).

51 FinancesQuébec,Tax Expenditures: 2010 Edition(QuebecCity:FinancesQuébec,2011),atA.59.

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are consumption taxes regressive in quebec? n 479

TAB

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480 n canadian tax journal / revue fiscale canadienne (2011) 59:3

Calculation of the non-taxable portion of spending on food bought in a store, Quebec, 2008Householdspending,

foodpurchasedfromstores . . . . . . . .$5,983a×3,351,040b=$20,049.3million

(A)

Taxexpenditures,basicgroceries . . . . . $1,161million/7.5%c=$15,480million (B)

Spendingonnon-taxedproductsasapercentageoftotalspendingonfoodpurchasedfromstores . . . . . .

77.2%

(B/A)

a Averageperhousehold.bTotalnumberofhouseholds.c ForgoneQSTrevenue÷QSTrate(2008)=valueofnon-taxedproducts.

Sources:StatisticsCanada,Survey of Household Spending, 2008(Ottawa:StatisticsCanada,2009),andcalculationsbytheauthors.FinancesQuébec,Tax Expenditures: 2010 Edition(QuebecCity:FinancesQuébec,2011);andcalculationsbytheauthors.

New Home Purchases

Concerningspendingonshelter,newhomepurchasesarenotincludedintheSHSbecausetheyarenotconsideredcurrentspending.Forinformationpurposes,wenotethatitispossibletoestimatethatonlyabout1.6percentofQuebechouseholdspurchasedanewhomein2008.52Estimatesofsuchpurchasescanbemadefromthevalueofresidentialbuildingpermits.53Sincethesepermitsamountedto$8.9billioninQuebecin2008,taxespaidwouldrepresent$445millioninGSTand$701mil-lioninQST.54However,purchasersofnewhomescanreceivepartialrebatesofGSTandQST,dependingonthevalueofthepurchase.55Thenetamountoftaxespaidisobtainedbysubtractingtheestimatedtaxrebates.Thisamount is thenallocatedamongthequintiles,usingtheallocationformortgagepaymentsshownintheSHS2008.

Government Revenues Derived from the QSTTojudgetheaccuracyoftheestimateoftaxescollectedusingtheSHS2008,theQSTrevenuecollectedbytheQuebecgovernmentin2008wasreconciledwiththere-sultsobtainedfromthemethodologicalapproach.Table3showstheconsistencyoftheexercisebyreconstitutingtotalQSTreceipts.Italsoindicatesthattheestimatesshownintable2forthevariousSHSspendingcategoriestogetheraccountforabout70percentoftheQSTcollectedbytheQuebecgovernment.

52 Ourcalculations,usingStatisticsCanada,CANSIMdatabasetables026-0001and027-0009,andtheSHS2008.

53 Usingthevalueofresidentialbuildingpermitsmeansthatweassumethatallbuildingpermitsissuedin2008ledtoasalein2008.Weknowthatisincorrect(somesalesin2008werefor2007permits,andsome2008permitswillresultinsalesin2009),butweuseitasaproxy.

54 InstitutdelaStatistiqueduQuébec,Principaux indicateurs économiques — Québec: Niveaux annuelles(www.stat.gouv.qc.ca/princ_indic/publications/indicat_ANNU.pdf ).

55 Tax Expenditures: 2010 Edition,supranote51,atA.59andB.232.

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The Survey of Labour and Income Dynamics

QuebechouseholdspayQSTandGSTontheirpurchases,andsomeofthemreceiverefundabletaxcreditsfortheQSTand/ortheGST.However,theSHSissilentontheallocation of GST and QST credits among households. To estimate the averageamountofrefundabletaxcreditsobtainedbyeachquintile,simpleapplicationoftherulesforcalculatingthesecredits,asdescribedearlier(seetable1andfigure1),isnotpossible.Variationsinfamilysituationwithineachquintilepreventthecalculationofaveragecreditsperquintile.Inaddition,itmayseemself-evidentthathouseholdsintheupperincomequintileswouldnotreceiveGSTorQSTcredits;however,someindividualsinthosehouseholdsmayqualifyforcredits—forexample,anadultstudent

TABLE 3 Reconciliation of QST Receipts, 2008

Receipts Revenue

$ millions

Totalreceipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,188

QSTpaida. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,378NetQSTpaidonnewresidentialdwellingsb. . . . . . . . . . . . . . . . . . . . . . . . . . 650NetQSTpaidbypublicserviceorganizationsc . . . . . . . . . . . . . . . . . . . . . . . . 401NetQSTpaidbymunicipalitiesd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 470QSTnotrecoveredonexemptgoodsandservicese . . . . . . . . . . . . . . . . . . . . . 1,207

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,106

Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82%difference. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.9%

a Thisamountisderivedfromthebreakdownoftaxableandnon-taxablegoodsandservicesshownintable2.

bResidentialbuildingpermitsin2008amountedto$8.9billion.Accordingly,theQSTpaidrepresented$702million,fromwhichQSTrebatesof$52millionaresubtracted.

c Publicserviceorganizations(charities,schools,hospitals,etc.)paytheQSTbutobtaintaxrebatesatveryspecificrates(50percentforcharities,47percentforschools,and51.5percentforhospitals).Accordingly,withthehelpofQuebectaxexpendituredata,whichshowstheamountofrebatespaidtopublicserviceorganizationsandtherebaterates,weareabletoobtainthenetamountofQSTpaid.

dThisamountisanestimatebasedoninformationobtainedfromtheministèredesAffairesmunicipales.

eSomegoodsandservicesareexemptfromtax(rent,forexample),buttaxablegoodsandservicesareconsumedasinputsinthedeliveryofsuchgoodsandservices.Forinstance,theownerofanapartmentbuildingpaysfortaxableservicesbutdoesnotchargetaxontherent.ToestimatetheamountofQSTnotcollectedonexemptgoodsandservices,wecalculated,againusingtheSurvey of Household Spending, 2008,theamountofQSTthatwouldhavebeenpaidhadtheynotbeenexempt.Wethensubtractedthetaxexpenditurefromtheamountobtained.Sources:CalculationsbytheauthorsbasedonStatisticsCanada,Survey of Household Spending, 2008(Ottawa:StatisticsCanada,2009);FinancesQuébec,Tax Expenditures: 2010 Edition(QuebecCity:FinancesQuébec,2011);andinformationprovidedbytheministèredesAffairesmunicipales.

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livingwithhishigh-incomeparents.Chawla56estimatedthatone-thirdoffamilieswithanannualincomeof$100,000ormorereceivedaGSTcreditin2003.Forthisreason,weuseStatisticsCanada’sSurveyofLabourandIncomeDynamics(SLID)toextractthevalueofaveragetaxcreditsperquintile,andthustocalculatenettaxespaidperquintile.57

CO NSUMP TIO N TA X ATIO N O F HO USEHO LDS IN 20 0 8

With taxableandnon-taxable spendingallocatedamongQuebechouseholdsac-cordingtoincomequintile,itisnowpossibletoassesstheresultsobtainedagainstthewidespreadperceptionthatconsumptiontaxesareregressive.

Breakdown of Consumption Taxes

Whiletable2showsthebreakdownbetweentaxableandnon-taxablespendingbasedontheSHS2008,table4showstheamountofGSTandQSTpaidperhouseholdineachincomequintilebasedonaveragespending.Totalconsumptiontaxespaidvaryfrom$1,012forahouseholdinthelowestquintileto$6,880forahouseholdinthehighestquintile.However,theseamountsdonottakeintoaccountsalestaxcreditsreceivedbysomehouseholds.Asdiscussedearlier,58thesecreditswereimplementedbythefederalandQuebecgovernmentswhentheGSTandQSTwerefirstintro-ducedinordertooffsettheadditionalburdenforthemostdisadvantaged.

Nettaxespaidarethencalculatedtakingtherefundablecreditsofeachquintileintoaccount.59Forthelowestquintile,refundablecreditsrepresent60.6percentofall consumption taxespaid.Thispercentage falls to34.3percent for the secondquintile,9.9percentforthethird,4.75percentforthefourth,andlastly,2.6percentforthehighestquintile.

56 RajK.Chawla,“TheGSTCredit”(2006)7:6Perspectives on Labour and Income13-21.

57 StatisticsCanada,Survey of Labour and Income Dynamics(Ottawa:StatisticsCanada,2005,2006,2007,and2008).Ofcourse,itwouldhavebeenpreferabletouseonesurveytoextractallthedatausedinthisstudy,buttheSHSprovidesnoinformationontaxcreditsgrantedtohouseholdsofeachquintile.However,weareassuredthatthetwosurveysarecompatible.Whilethematchingbetweenthemisnotperfect,in2007,fromonesurveytotheother,thedifferencesintheupperlimitsofthequintilesandtheweightednumberofhouseholdsdifferonaveragebyonly6percent.WeconsiderthatthesedifferencesmakeitnotunreasonabletousetheGSTandQSTcredits(informationdrawnfromtheSLID)andapplythemtothequintilestakenfromtheSHS.

58 Seesupranote39andtherelatedtext.

59 TheGSTcreditisseparatelyidentifiedintheSLID.WithregardtotheQSTcredit,theSLIDincludesdatafor“provincialtaxcredits,”inwhichtheQSTcreditisdominant,butitalsoincludesothercredits.Thus,forallhouseholdsthathadaGSTcredit,wedeterminethevalueoftheQSTcreditusingthesameweightingasthatofthe“provincialtaxcredits”inordertoobtainthecostoftheQSTcreditin2008($505million).FromJuly2011,theQSTcreditistobecombinedwithtwoothercreditstoformthesolidaritytaxcredit.But,forthisstudy,itispossibletoisolatetheportion“QSTcredit.”

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Accordingly,takingtaxcreditsintoaccount,thedatashowthatahouseholdinthelowestquintilepaidanaverageof$398innettaxes.Thisamountrisesfromquintiletoquintile,reaching$6,704onaverageforahouseholdinthehighestquintile.

Byaddingthetotaltaxesandtotalnettaxespaidforallquintiles,wecancalculatetheshareoftaxespaidbyeachquintile.Figure2showsthathouseholdsinthelow-estquintile,whichaccountfor20percentofhouseholds,paidroughly6percentoftotaltaxesandroughly3percentofnettaxespaidin2008.Thisproportionrisesfromonequintiletothenext,upto40percentoftotaltaxesand44percentofnettaxesforthehighestquintile.

Whileitisstilltooearly,onthissimplebasis,toruleontheregressiveorpro-gressivenatureofconsumptiontaxes,table4andfigure2makeitpossibletostateataminimumthattheamountoftotalandnettaxespaidrisesappreciablyfromonequintiletothenext,withtheresultthatthefirstthreequintilespaylessthantheirweightasaproportionoftotalhouseholds,whilethesituationisthereverseforthetwoupperquintiles,whichtogetherpayover70percentofnettaxespaid.

Are Consumption Taxes in Quebec Truly Regressive?

Usingthedatapresentedabove,wecannowdealwiththequestionoftheprogres-sivityorregressivityofconsumptiontaxesforQuebechouseholds.Itwillthenbe

TABLE 4 Consumption Taxes Paid by Households, by Income Quintile, Quebec, 2008

Lowest Second Third Fourth Highest quintile quintile quintile quintile quintile

dollars

Spendingbyhouseholds(includingGSTandQST)a . . . . 9,110 17,938 27,249 37,839 61,307

QSTpaidb . . . . . . . . . . . . . . . . . . . 610 1,212 1,864 2,588 4,212GSTpaidb. . . . . . . . . . . . . . . . . . . 402 79 1,190 1,650 2,668

Totaltaxespaid . . . . . . . . . . . . . . . 1,012 2,002 3,054 4,238 6,880RefundableGSTcredit . . . . . . . . . (353) (432) (213) (131) (119)RefundableQSTcredit . . . . . . . . . (260) (255) (88) (59) (58)

Totalrefundablecreditsc . . . . . . . . (614) (687) (301) (190) (176)

Totalnettaxespaidc . . . . . . . . . . . 398 1,315 2,752 4,049 6,704

a ComprisestaxablespendingfromtheSurvey of Household Spending, 2008,plusanamountthatwehaveestimatedforthepurchaseofnewhomes.Asnotedintable3,taxablespendingincludesitemsthatarenotsubjecttoQST(books,diapers,andtobacco).Thisisreflectedinthecalculationoftaxespaid.

bIncludesthenettaxonnewhomes.c Totalsmaynotaddbecauseofrounding.

Source:Calculationsbytheauthors,basedonStatisticsCanada,Survey of Household Spending, 2008(Ottawa:StatisticsCanada,2009),andSurvey of Labour and Income Dynamics,2008(Ottawa:StatisticsCanada,2010).

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possibletoinvalidatethepositionthatlower-incomehouseholdsallocatealargershareoftheirincometoconsumptiontaxesthanhigh-incomehouseholds.

Tax Concentration CurveAsdescribedearlier,itispossibletomeasuretheprogressivityofaformoftaxationbydrawingaLorenzcurveandataxconcentrationcurvesidebyside.Thismeasureindicatesthatiftaxesarebetterdistributedthanincome,thiscanonlybeachievedbywhatiscalledaprogressivetax.Accordingly,ataxisprogressiveifateachpointof aggregatepopulation, theLorenz curve is above the tax concentration curve,implyingthatthepercentageofthepopulationinquestionispayinglesstaxasaproportionofitsshareofincome.

Figure3 shows the twocurves for consumption taxes (QSTand GST)paid inQuebecin2008.Theleftpartofthefigureshowsthatwithouttaxcredits,QSTandGSTareproportionaltaxes.Intherightpart,theconcentrationcurveofnettaxespaidliesintheprogressivityzonebybeingbeneaththeLorenzcurveateachpoint.

Index of the Share of Taxes as a Proportion of the Share of IncomeAsindicatedinourearlierdiscussionofmeasuresofprogressivity,ifataxisdistrib-utedproportionally,theindexoftheshareoftotaltaxespaidtotheshareoftotalincomeforallhouseholdsinaquintilewillbeequalto1.AccordingtoRuggeri’sapproach,ataxisprogressivewhentheindexforthelowerquintilesislessthan1

FIGURE 2 Share of Consumption Taxes Paid by Income Quintile, Quebec, 2008

Total taxes

Lowest quintile5.9%

Second quintile11.7%

Lowest quintile2.6% Second quintile

8.6%

Fourth quintile24.7%

Thirdquintile17.8%

Highestquintile40.0%

Fourthquintile 26.6%

Thirdquintile18.1%

Highestquintile44.0%

Net taxes

Source: Calculations by the authors, based on Statistics Canada, Survey of Household Spending, 2008 (Ottawa: Statistics Canada, 2009), and Survey of Labour and Income Dynamics, 2008 (Ottawa: Statistics Canada, 2010).

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FIGURE 3 Lorenze Curve and Concentration Curve of Total and Net Consumption Taxes Paid, Quebec, 2008

Source: Calculations by the authors, based on Statistics Canada, Survey of Household Spending, 2008 (Ottawa: Statistics Canada, 2009), and Survey of Labour and Income Dynamics, 2008 (Ottawa: Statistics Canada, 2010).

Agg

rega

te o

f net

taxe

s pai

d or

net

inco

me

(%)

0 20 40

Aggregate population (%)

Total taxes

Net taxes

Concentration (aggregate total taxes paid)Lorenz (aggregate net income)

60 80 100

Agg

rega

te o

f net

taxe

s pai

d or

net

inco

me

(%)

0 20 40

Aggregate population (%)

Concentration (aggregate net taxes)Lorenz (aggregate net income)

60 80 100

Progressivity zone

0

20

40

60

80

100

0

20

40

60

80

100

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whiletheindexfortheupperquintilesisgreaterthan1.Figure4showsthisindexfortotalandnetconsumptiontaxespaidbyQuebechouseholds.Intheleftpartofthefigure,thetotaltaxespaid(QSTandGSTbeforetaxcredits)areproportional.Intherightpart,forthelowestandthesecondquintiles,theshareofnettaxespaidisbelowtheshareofincome,whiletheoppositeholdsfortheotherthreequintiles.So,giventheindexcomputedfromnettaxes,wecanconcludethatinQuebeccon-sumptiontaxesareprogressive.

Measurement of the Effective Consumption Tax RateLastly,progressivityispresentiftheeffectiverateofconsumptiontaxrisesbetweentwosituations,suchthatthechangeintaxesexceedsthechangeinincome.Figure5showstheaverageeffectivetaxrateforeachquintile,representingtheshareofnetincomethathouseholdsinthatquintileallocatetotaxespaid,withandwithouttaxcredits. The lowest quintile had an average effective consumption tax rate of6.4percentwithouttaxcreditsand2.5percentincludingtaxcredits.Theaverageeffectiveraterisessignificantlybetweenthelowestandthesecondquintilesbeforebecomingmoreproportional,withaslightdeclineforthehighestquintile.

Overall,consumptiontaxesinQuebecareproportionalwithouttaxcreditsandprogressivewithtaxcredits.

Fortheremainderofthisanalysis,wewillusetheeffectivetaxratetoillustrateprogressivityinconsumptiontaxesinQuebec.

Table5reportstheeffectiveGSTandQSTratesforeachincomequintile,beforeandaftertakingtherespectivetaxcreditsintoaccount.Itshowsthatbeforetaxcred-its,bothtaxesareroughlyproportional,whileaftertaxcredits,theyareprogressive.

FAC TO R S O F PRO GRE SSI V IT Y O F CO NSUMP TIO N TA X E S IN QUEBEC

NowthatwehavefoundadegreeofprogressivityforconsumptiontaxespaidinQuebec,itisusefultoattempttoidentifyitssource.Forthisexercise,wefocusinparticularontwomeasures—thezero-ratingofbasicgroceriesandtheprovisionofrefundabletaxcredits—andseparatelycalculatetheireffectontheeffectivecon-sumptiontaxrateforeachquintile.

Table6showsthatthezero-ratingofbasicgroceriesisofgreaterbenefittoallincomequintileswhilethetaxcreditsaremorefocusedonhouseholdsinthelowestquintile.In2008,the$1.9billionallocatedtothezero-ratingofgroceriesreducedthe effective tax rate of the lowest quintile (before tax credits) by 2 percentagepoints.Ontheotherhand,theGST-QSTcreditscost$1.4billion,andtheireffectontheeffectiverateofthelowestquintilewastwiceasgreat—thatis,areductionof3.9percentagepoints.TheGST-QSTrefundablecreditsthusprovetobecrucial.Withoutthem,theeffectiveconsumptiontaxrateofthetwohighestquintilesde-creases,relativetothelowerquintiles.

Zero-ratingofbasicgroceriesandrefundableGST-QSTcreditsgiverisetocostsforeachgovernment.In2008,zero-ratingofbasicgroceriescosttheQuebecgov-ernment$1.2billion,andtheportionofthefederalcostofthismeasureattributable

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FIGURE 4 Index of the Share of Consumption Taxes Paid as a Proportion of the Share of Income, by Income Quintile, Quebec, 2008

Total taxes

0.911.03 1.03 1.02 0.98

Net taxes

Source: Calculations by the authors, based on Statistics Canada, Survey of Household Spending, 2008 (Ottawa: Statistics Canada, 2009), and Survey of Labour and Income Dynamics, 2008 (Ottawa: Statistics Canada, 2010).

Highestquintile

Fourthquintile

Thirdquintile

Secondquintile

Lowestquintile

0.40

0.76

1.05 1.10 1.08

Highestquintile

Fourthquintile

Thirdquintile

Secondquintile

Lowestquintile

FIGURE 5 Effective Combined Consumption Tax Rates, With and Without Tax Credits, for Each Income Quintile, Quebec, 2008

Source: Calculations by the authors, based on Statistics Canada, Survey of Household Spending, 2008 (Ottawa: Statistics Canada, 2009), and Survey of Labour and Income Dynamics, 2008 (Ottawa: Statistics Canada, 2010).

Eff

ectiv

e ta

x ra

te (%

)

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Highestquintile

Fourthquintile

Thirdquintile

Secondquintile

Lowestquintile

6.4

2.5

7.3

4.8

6.66.9 6.7

7.3 7.2 6.9

With tax credits Without tax credits

toQuebecamountedto$0.8billion.TheGSTandQSTcreditsgeneratedrevenueshortfallsin2008of$836millionand$500millionrespectively.Table7allocatesthesecostsamongthequintiles.Itcomesasnosurprisethatthelargestshareofthetaxcredits(65.8percent)goestothetwolowestquintiles.However,thebenefitsfromzero-ratingbasicgroceriesareenjoyedtoamuchmoresubstantialdegreebythetwohighestquintiles.Thus,evenifgovernmentschosetozero-ratebasicgroceries

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inordernottopenalizelow-incometaxpayers,thecostforthetwotopquintilesissignificantlyhigher,at55percentversus26percentforthetwolowestquintiles.

IMPAC T O F CH A NGE S TO G S T A ND QS T R ATE S

ConsideringtherecentreductionsintheGSTrateandrecentandforthcomingin-creasesintheQSTrate,itisusefultoanalyzetherepercussionsofthesechangesontheeffectiveconsumptiontaxrateforeachincomequintile.Fromthisanalysis,wecan observe which quintiles benefit from a reduction in their effective rate andwhichquintilesexperienceanincreaseintheirrateinthewakeofchangestoGSTandQSTrates.Inthecalculationsthatfollow,weusetheeffectivetaxratesafterrefundableGST-QSTcredits.

TABLE 6 Sensitivity of Effective Consumption Tax Rates to the Zero-Rating of Basic Groceries and to GST-QST Credits, by Income Quintile, Quebec, 2008

Lowest Second Third Fourth Highest quintile quintile quintile quintile quintile

percent

Withoutzero-ratingofbasicgroceriesandwithoutcredits . . . 8.4 9.0 8.7 8.5 7.8

WithoutrefundableQSTandGSTcredits . . . . . . . . . . . . . 6.4 7.3 7.3 7.2 6.9

Realaverageeffectiverates. . . . . . . 2.5 4.8 6.6 6.9 6.7

Source:Calculationsbytheauthors,basedonStatisticsCanada,Survey of Household Spending, 2008(Ottawa:StatisticsCanada,2009),andSurvey of Labour and Income Dynamics,2008(Ottawa:StatisticsCanada,2010).

TABLE 5 Effective GST and QST Rates for Each Income Quintile, Quebec, 2008

Lowest Second Third Fourth Highest quintile quintile quintile quintile quintile

percent

BeforetaxcreditsGST . . . . . . . . . . . . . . . . . . . . . 2.6 2.9 2.8 2.8 2.7QST . . . . . . . . . . . . . . . . . . . . . 3.9 4.4 4.5 4.4 4.2

Total . . . . . . . . . . . . . . . . . . . . . 6.5 7.3 7.3 7.2 6.9

AftertaxcreditsNetGST. . . . . . . . . . . . . . . . . 0.3 1.3 2.3 2.6 2.6NetQST. . . . . . . . . . . . . . . . . 2.2 3.5 4.2 4.3 4.2

Total . . . . . . . . . . . . . . . . . . . . . 2.5 4.8 6.6 6.9 6.7

Source:Calculationsbytheauthors,basedonStatisticsCanada,Survey of Household Spending, 2008(Ottawa:StatisticsCanada,2009),andSurvey of Labour and Income Dynamics,2008(Ottawa:StatisticsCanada,2010).

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The Reductions in the GST Rate in 2006 and 2008

ThefederalgovernmentreducedtheGSTratefrom7percentto6percentonJuly1,2006andto5percentonJanuary1,2008.Sincethesereductionstookeffectonly18 months apart, we have assumed that household spending patterns were un-changedforeachquintile.Consequently,theanalysisusestheSHS2008dataandtheGSTratesinforcein2005,2006,2007,and2008.For2006,sincetheGSTratewasreducedonJuly1,aweightedrateof6.5percentisused.ConcerningtherefundableGSTcredit,sinceitsparameterswerenotchangeddespitetheratereductions,itsvalueisnotchangedinourcalculations.

Table8showsthechangeintheeffectiveconsumptiontaxrateforeachquintilefrom2005through2008.Whiletheeffectiverateofeachquintiledeclined, it ispossibletonotethatinproportionalterms,thefirstquintilebenefitedmostfromtheGSTreduction.Thisresultcanbeexplainedbythefactthat,whereastheGSTratewasreduced,theGSTcreditwasleftunchanged.

The Increases in the QST Rate in 2011 and 2012

Asdiscussedearlier,theQSTrateincreasedto8.5percentonJanuary1,2011,andistoincreaseagainto9.5percentonJanuary1,2012.Sincetherearenodataprojectinghousehold spending, we again assume that household spending patterns remainunchanged.Consequently,theanalysisusestheSHS2008dataandtheQSTratesinforce,orexpectedtobeinforce,in2008through2010,2011,and2012.ConcerningtherefundableQSTcredit,sinceitsparameterswillberaisedateachincreaseintheQSTrate,theannouncedincreasesinthecreditareincorporatedintotheanalysis.Table9showsthattheeffectiverateofeachquintilewillrise,buttheincreasewillbesmallestforthelowestquintile,thankstotheincreaseinthesolidaritytaxcredit.60

TABLE 7 Cost of GST-QST Credits and of Zero-Rating of Basic Groceries, Allocated by Income Quintile, Quebec, 2008

Lowest Second Third Fourth Highest All quintile quintile quintile quintile quintile households

$ millionsRefundabletaxcredit. . . . . 414 464 205 130 122 1,336

QST . . . . . . . . . . . . . . . 178 175 62 43 42 500GST . . . . . . . . . . . . . . . 237 289 143 88 79 836

Zero-ratingofbasicgroceries. . . . . . . . . . . . . 206 302 369 470 603 1,950

QST . . . . . . . . . . . . . . . 123 181 221 282 362 1,170GST . . . . . . . . . . . . . . . 82 121 148 188 241 780

Source:Calculationsbytheauthors,basedonStatisticsCanada,Survey of Household Spending, 2008(Ottawa:StatisticsCanada,2009),andSurvey of Labour and Income Dynamics,2008(Ottawa:StatisticsCanada,2010).

60 Asnotedearlier,theQSTcreditwillbepartofthesolidaritytaxcredit.Inthesolidaritycredit,however,wecanisolatetheQSTcreditcomponent.Inourcalculations,weconsideronlythiscomponent.

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TABLE 8 Changes in Effective Consumption Tax Rates, by Income Quintile, Quebec, 2005-2008

Percentagechange 2005 2006 2007 2008 2008-2005Quintile (1) (2) (3) (4) (4-1)/(1)

percent

Lowest. . . . . . . . . . . . . . . 3.6 3.3 3.1 2.5 −30Second. . . . . . . . . . . . . . . 6.0 5.7 5.4 4.8 −20Third. . . . . . . . . . . . . . . . 7.7 7.5 7.2 6.6 −15Fourth . . . . . . . . . . . . . . . 8.1 7.8 7.5 6.9 −14Highest . . . . . . . . . . . . . . 7.8 7.6 7.3 6.7 −14

Note:QSTrate:7.5percent(allyears).GSTrate:2005,7.0percent;2006,6.5percent(weightedaverage);2007,6.0percent;2008,5.0percent.Source:Calculationsbytheauthors,basedonStatisticsCanada,Survey of Household Spending, 2008(Ottawa:StatisticsCanada,2009),andSurvey of Labour and Income Dynamics,2008(Ottawa:StatisticsCanada,2010).

Changes in the Combined GST-QST Rate, 2005-2012

ThecombinedGST-QSTratewillreach14.98percentin2012,almostrestoringtheratethatappliedin2005(15.03percent).However,onecannotsimplysaythatthisisareturntosquareone,andconcludethatthisisequivalenttoatransferofconsump-tiontaxpointsfromthefederalgovernmenttotheQuebecgovernment.Table10comparestheeffectivetaxrates,byquintile,forconsumptiontaxesin2005and2012(projected).Itshowsalargedropintheeffectiverateforthelowestquintileandasignificantdropforthesecond.Fortheotherthreequintiles,in2012thesituationeffectivelyrevertstowhatitwasin2005.

TABLE 9 Changes in Effective Consumption Tax Rates, by Income Quintile, Quebec, 2008-2012

Percentagechange 2008-2010 2011 2012 2012-2008Quintile (1) (2) (3) (3-1)/(1)

percent

Lowest. . . . . . . . . . . . . . . . . . . . . . . 2.5 2.6 2.7 7Second. . . . . . . . . . . . . . . . . . . . . . . 4.8 5.1 5.5 15Third. . . . . . . . . . . . . . . . . . . . . . . . 6.6 7.1 7.6 15Fourth . . . . . . . . . . . . . . . . . . . . . . . 6.9 7.5 8.0 16Highest . . . . . . . . . . . . . . . . . . . . . . 6.7 7.3 7.8 16

Note:ActualandannouncedQSTrates:2008-2010,7.5percent;2011,8.5percent;2012,9.5percent.GSTrate:5percent(allyears).Source:Calculationsbytheauthors,basedonStatisticsCanada,Survey of Household Spending, 2008(Ottawa:StatisticsCanada,2009),andSurvey of Labour and Income Dynamics,2008(Ottawa:StatisticsCanada,2010).

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are consumption taxes regressive in quebec? n 491

TABLE 10 Effective Consumption Tax Rates, by Income Quintile, Quebec, 2005 and 2012

Percentagechange 2005 2012 2012-2005Quintile (1) (2) (2-1)/(1)

percent

Lowest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6 2.7 −25Second. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.0 5.5 −8Third. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.7 7.6 −2Fourth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1 8.0 −1Highest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.8 7.8 0

Note:QSTrates:2005,7.5percent;2012,9.5percent.GSTrates:2005,7.0percent;2012,5.0percent.Source:Calculationsbytheauthors,basedonStatisticsCanada,Survey of Household Spending, 2008(Ottawa:StatisticsCanada,2009),andSurvey of Labour and Income Dynamics,2008(Ottawa:StatisticsCanada,2010).

CO NCLUSIO N

Areviewoftheliteratureleadstothegeneralconclusionthatconsumptiontaxesareregressive.However,itisacknowledgedthatgovernmentshavetoolsavailabletomitigateorevenreversethissituation.InthewakeoftherecentreductionsintheGSTrateandtheannouncementsofincreasesintheQSTrate,wewantedtoassesshowtheGST-QSTburdenisdistributedforQuebechouseholds.

Usingdata fromtheSHS2008,wehaveclassifiedoverallcurrent spending inQuebeconthebasisofitstaxableornon-taxablestatus.Thesubsequentanalysis,usingwell-documentedmethodologies,showsthebreakdownofnetconsumptiontaxespaidbyhouseholdsgroupedintoincomequintiles,anddeterminestheeffect-iveconsumptiontaxrateforeachquintile.Householdsizeisnottakenintoaccountintheanalysis;thisislefttofutureresearch.61

WhilethereisnostudydealingspecificallywiththeregressivenatureofeithertheGSTortheQST,itisnotinfrequentinQuebectohearthatconsumptiontaxesarearegressiveformoftaxation.However,ourresultscontradictthisview.

In2008,householdsinthelowestquintilepaid$398inGST-QST,takingintoac-countrefundableGSTandQSTcredits,comparedwith$6,704forhouseholdsinthehighestquintile.Allocatingtotalnettaxespaidin2008amongtheincomequintiles,thesharepaidbythe20percentofhouseholdswiththelowestincomeiscalculatedtobe2.6percent,comparedwith44.1percentforthe20percentofhouseholdswiththehighestincome.

InQuebec,thankstotheexclusionofcertaingoodsandservicesfromtheapplica-tionoftheGST-QST,butespeciallybecauseoftherefundableGST-QSTcredits,itisfalsetostatethatlower-incomehouseholdsallocatealargershareoftheirincome

61 Seesupranote47.

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492 n canadian tax journal / revue fiscale canadienne (2011) 59:3

totaxesthanhigher-incomefamilies.Offsettingmeasureseliminatetheinherentregressivityofconsumptiontaxes.

Theriseintheeffectivetaxrateforconsumptiontaxesfromonequintiletothenext confirms that the applicationof consumption taxes inQuebec in2008wasprogressive(becausethechangeinnettaxespaidisproportionallygreaterthanthechangeinincome).Theeffectiveraterisessignificantlyforthelowestandsecondquintilesbeforebecomingmoreproportional.

TheanalysisalsoshowstheimpactoftherecentreductionsintheGSTandtheannouncedincreasesintheQST.WhileallhouseholdsbenefitedfromtherecentdecreasesintheGSTrate,thiswasespeciallytrueofhouseholdsinthelowerquintiles.AsforthefutureincreasesintheQST,theywillresultinincreasesintheeffectivetaxrateforallquintiles,buthouseholdsinthelowestquintilewillbeaffectedtoalesserdegree.Itissignificantthat,whilethefederalgovernmentdidnotadjusttheGSTcreditdownwardwhenthetaxratewasreduced,theQuebecgovernmentmadeapointofenhancingitscreditaspartoftheincreasestotheQSTrate.

Comparingthesituationthatwillexistin2012withtheonein2005,thereplace-mentoftwopointsofGSTbytwopointsofQST,combinedwiththechangestotheQSTcredit,willresultinadeclineintheaverageeffectivetaxrateofthefirsttwoincomequintiles,whilethatoftheotherthreequintileswilldropslightlyorremainunchanged.

Toconclude,whiletheanalysisrevealsthattheapplicationoftheGST-QSTisprogressiveinnature,itgoeswithoutsayingthatprogressivityismorepronouncedintheapplicationofincometaxinQuebec.TheQuebecgovernmentcontinuestorelyheavilyontheincometaxasasourceofrevenue.62Asaproportionofgrossdomesticproduct,incometaxationismoreimportantinQuebecthanintheotherprovincesandtheG7countriesasawhole.Accordingly,theaggregateprogressivityofconsumptiontaxesandincometaxesisgreaterthanthatofthetaxestakensepar-ately.Table11 shows the average total tax loadofhouseholds in eachquintile,takingintoaccountincometaxes,socialcontributions,GST,andQST.Measuredasaproportionoftotalincome,theraterisesfrom5.9percentforthelowestquintileto33.8percentforthehighest,clearlyshowingthattheuseoftaxesandsocialcon-tributionsisprogressiveinQuebec.

62 LucGodbout,SuzieSt-Cerny,andChantalAmiot,Année d’imposition 2008 : Une charge fiscale nette plus faible et des impôts sur le revenu plus élevés qu’ailleurs, est-ce possible?WorkingPaperno.2010/03(Sherbrooke,QC:Chairederechercheenfiscalitéetenfinancespubliques,UniversitédeSherbrooke,2010).

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are consumption taxes regressive in quebec? n 493

TABLE 11 Average Tax Load of Households, by Income Quintile, Quebec, 2008

Lowest Second Third Fourth Highest quintile quintile quintile quintile quintile

dollars

Totalincome . . . . . . . . . . . . . . . . . 16,253 30,977 51,239 77,281 140,255Lesspersonalincometax(1) . . . . . 349 2,564 7,564 15,589 36,047After-taxincome . . . . . . . . . . . . . . 15,904 28,413 43,675 61,692 104,208Lesssocialcontributions(2). . . . . 204 929 1,880 3,132 4,669Netincome . . . . . . . . . . . . . . . . . . 15,700 27,484 41,795 58,560 99,539LessQSTandGST(3) . . . . . . . . . 398 1,315 2,752 4,049 6,704Netafter-taxincome........... 15,301 26,168 39,043 54,511 92,835Taxload(1+2+3) . . . . . . . . . . . 951 4,808 12,196 22,770 47,420

percentTaxloadasapercentageof

totalincome . . . . . . . . . . . . . . . . 5.9 15.5 23.8 29.5 33.8

Source:Calculationsbytheauthors,basedonStatisticsCanada,Survey of Household Spending, 2008(Ottawa:StatisticsCanada,2009),andSurvey of Labour and Income Dynamics,2008(Ottawa:StatisticsCanada,2010).

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