Carrying out market reforms for sustained economic development is impossible without an effective system of taxation. The tax system reflects the general state of the economy, depending on it and, in turn, actively influences economic processes. Therefore the main task of further improving the tax system is reducing the real tax burden on manufacturers, coupled with the unconditional provision of necessary financial resources, budgets of all levels.
Under current conditions of the economic situation, an additional stimulus is required. It is necessary to ensure the most even distribution of the tax burden by equalizing the tax base. In the tax system, there are plenty of benefits, but their effectiveness is extremely low. A situation emerges, where honest taxpayers have to bear the burden not only for themselves but for non-payers as well. One of the incentives for the economy today can become a further reduction in GST (Tax Design Considerations 70-86).
From the perspective of macroeconomics, reduction of taxes stimulates the growth of both aggregate demand and aggregate supply. The less taxes, the more disposable incomes have the households for consumption. Thus, aggregate consumption rises, and hence aggregate demand does. Therefore, the governments reduce taxes when running stimulating economic policies, i.e., when the purpose of government is to lift the country out of the bottom of the economic cycle. Thus, the tax rate is inversely proportional to the value of the aggregate supply (Tax Design Considerations 70-86).
However, the GST tax is effective only in cases where consumers buy some goods. In the long term, reduction of personal and business taxes is more profitable. It makes people work harder and invest, and makes businesses expand or modernize their production or operations, acquiring new equipment (Towards a less distortive and more efficient tax system 49-83).
On the other hand, the decline in consumer taxes is not the biggest contribution to the stimulation of increased consumer spending. Furthermore, the reduction of income tax may not matter to businesses because the incomes themselves today are very difficult to speak about. And there is a powerful argument confirming this position: a reduction of income tax was suggested a very long time ago, and this measure was designed to increase enterprises’ investment in development of production. During the crisis the investment rate is close to zero, but in a period of stagnation and decline in demand for goods and services, the saved 2% can hardly in some way affect the financial situation of companies (Towards a less distortive and more efficient tax system 49-83).
Of course, lowering the income tax rate is a positive phenomenon. But this measure can doubtfully be effective in a crisis, because many businesses today not only lost profits, but can barely make ends meet. And the main problems of the crisis, a significant decline in prices for oil and metals and reduced demand for products, remain unresolved.
People, not having the money, do not buy goods. Enterprises producing these goods are not able to pay employees and buy new machinery and equipment. Manufacturers of machinery and equipment, not having sales, do not buy the metals and components. And so on. To solve the problem, it is necessary to increase the effective demand, i.e., to increase pensions and salaries of low paid workers. In order to avoid inflation, the effective demand must be balanced with product offerings. The most effective way to solve problems is the tax regulation (optimization of tax rates, improving tax administration, including those relating to GST) and fiscal policy (government spending, intergovernmental regulation, etc.) (Tax Design Considerations 70-86).
At the same time, now is the right time to reduce the GST, as the national economy needs an immediate stimulation, and the reduction of personal and business taxes is better suited to strengthen the foundations of the economy in the long term.
Variation of the GST, as history shows, helps to strengthen the economy. Reduction of GST in the past two years (1% a year) has helped to significantly increase sales. For example, according to Statistics Canada, in January 2008, immediately after the reduction of GST, the country registered growth in sales of goods by 1.5%. Reduction took effect on January 1, 2008. The number of units sold in January for cars increased by 16.2% compared with December 2007 (Towards a less distortive and more efficient tax system 49-83).
Thus, the increase in tax revenues can be achieved by broadening the tax base. The latter, in turn, is impossible without the conditions of production growth, including through effective tax relief with a tightly controlled system of targeted financial support to organizations and individuals truly in need of such support. There should not be many of them, and they must be economically feasible and should practically prove their effectiveness, such as reduction of GST in the period of the economy crisis and reduction of income taxes for getting long term effects.
Tax Design Considerations. OECD Taxation 8 (2010): 70-86. Print.
Towards a less distortive and more efficient tax system. OECD Economic Surveys 16 (2010): 49-83. Print.