Reforming Indirect Taxes in Canada: Some General Equilibrium Estimates

Bob Hamilton and John Whalley

Canadian Journal of Economics, 1989, vol. 22, issue 3, 561-75

Abstract: The current indirect tax system in Canada distorts economic activity in a variety of ways and has been the subject of considerable discussion as part of overall tax reform. In this paper, a general equilibrium model is used to analyze various changes in indirect taxes in Canada, focusing on possible changes to the federal and provincial sales taxes. Results suggest that replacing either the federal or provincial sales taxes with a broadly-based sales tax yields a small, but significant, welfare gain. The distributional effects from these changes are slightly regressive, but appear to be quite small and easily offset by modest income tax credits targeted to low-income households. Results also suggest that a broad-based sales tax would be a significantly more efficient revenue source, should additional sales tax revenues be required.

Date: 1989
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