What is the Canadian experience with a VAT?
Concerns about regressivity, transparency, coordination with state sales taxes, and money machines can be assuaged by observing the Canadian value-added tax experience.
In 1991, Canada implemented a 7 percent national VAT to replace a tax on sales by manufacturers. The VAT was introduced by the conservative party, which had concerns about industry competitiveness and the country’s fiscal situation.
Canada addressed distributional concerns by applying a zero rate to certain necessities—including groceries, drugs, and rent—and adding a refundable credit to the income tax. Transfer payments had been indexed for inflation and were highly progressive, providing further insulation against regressivity.
The Canadian VAT is completely transparent: it is listed separately on receipts and invoices just like sales taxes in the United States.
The Canadian experience also shows that a federal VAT can successfully coexist with either a VAT or a retail sales tax levied by subnational governments.
And the VAT in Canada has not been anything like a “money machine.” The standard VAT rate declined over time to 6 percent in 2006 and 5 percent in 2008. In both revenues and expenditures, the size of the Canadian federal government as a share of the economy has shrunk significantly since introduction of the VAT. General government tax revenue and spending in Canada has actually fallen as a share of the economy since 1991.
Bird, Richard M. and Michael Smart, (2014) “VAT in a federal system: Lessons from Canada.” In Public Budgeting & Finance, Vol. 34, Issue 4, pp. 38-60.
Sullivan, Martin A. 2011. “VAT Lessons from Canada.” In The VAT Reader (283–90). Falls Church, VA: Tax Analysts.
Tax Analysts. 2011. The VAT Reader: What a Federal Consumption Tax Would Mean for America. Falls Church, VA: Tax Analysts.