From: cbbrowne@csi.uottawa.ca (Christopher Browne)
Subject: Re: GST Deferral
Keywords: GST, Money, economics
Organization: Dept. of Computer Science, University of Ottawa
Date: Thu, 28 Jan 93 02:00:09 GMT

In article <1993Jan27.210453.21985@bnr.ca> bucknerb@bnr.ca (Brent Buckner) writes:
>
>Please check again.  I do talk about NPV of taxes paid.

Agreed.  However, you weren't comparing the right things.  Your
implication was that "deferral of GST" was a bad thing for the
government.  Thus, the appropriate comparison would be between:
a) Deferral of GST via savings, and
b) No deferral of GST.

So that is what I presented.

The two scenarios that you present compare a consumption tax to an
income tax, and basically just show that governments will tend to
benefit more from an income tax, which is an entirely different point.
>
>Yes, you are correct that if you make either of these choices,
>you simply tax at the beginning or end of a series.   
>Commutivity of multiplication yields the same results.
>However, the usual complaint that people raise about consumption taxes
>deals explicitly with investment.  
>
>Indeed, one of the reasons that the Tories promoted the GST
>was to tax consumption and encourage investment.  If you
>do this, then _ignoring second-order effects_, the government
>relinquishes revenue.

Do they?  Is the deferred tax a "second-order" effect?  I think it's a
first order effect, since it doesn't require anything more than a
simple discounting.

>>You also ASSUME that the government suffers.  Let's look at it from
>>the government's point of view, since you never presented any facts
>>that deal directly with THEIR cash flows.
>
>Again, check the references to NPV of taxes paid.  To make it
>explicit, note that you pay more than just the tax on the initial
>lump sum in Scenario 2.

Yes, but the value to both taxpayer and government are THE SAME.  I'm
not sure I understand your point here.

>    [Scenarios I and II deleted] 
>
>>
>>Scenario III:
>>
>>The lump sum of $10,000 is saved at a 15% interest rate for 10 years,
>>and the government/individual's discount rate for NPV purposes is 10%,
>>(Lots of 10s!) and a GST rate of 7%.  At the end, the resulting money
>>is spent, and GST is attributed.
>
>Aside:
>If _as a rule_ individuals could earn a higher rate of interest than
>their own and the government's discount rate for NPV purposes,
>things would be rather odd.

Assume 3 rates:
a) Return on investment: I
b) Personal cost of capital: P
c) Government cost of capital: G

Why would it be odd?

a) If an individual can't earn a higher rate of return (not limited to
interest) than their "capital cost", P, which presumably resembles the
inflation rate, then there is no advantage to actually saving money,
because all it means is that the individual erodes their buying power.

Thus, I would typically expect the relationship I > P.

P would probably look very much like the inflation rate.

b) The government can tend to borrow money at a better rate than most
individuals can, due to the fact that governments are perceived as
being "more stable."

I would strongly expect to see the relationship G < P.

>>The difference between GST deferral/no GST deferral can probably be
>>expressed as a fairly simple formula, which I don't have the patience
>>to put together at this point.  But I'm sure that it would show that
>>deferral of GST is NOT hurtful to the government as a NET economic
>>effect.
>
>We're playing around with two styles of GST:  with deferral
>and without deferral (which seems to me to simply be a flat income
>tax).  We're playing around with two choices:  spend now or spend later
>(investing in the meanwhile).

Your "Scenario II" is NOT a sales tax, because it taxes based on
income.  If it's not a tax on "Goods and Services," then it can't be
called a GST.

Call it a comparison between a consumption tax and an income tax; it's
NOT talking about whether a consumption tax is, by itself, either a
good or a bad thing.

>There are four scenarios.  Spend now under GST with deferral,
>spend now under GST without deferral, and spend later under
>GST with deferral all yield the same NPV for the individual
>and the same NPV for the government.  Spend later under
>GST without deferral is the odd scenario out.

I'd describe the cases as follows:
a) Spend now, under income tax
b) Spend now, under GST
c) Spend later, under income tax
d) Spend later, under GST

I'm afraid that it starts to get very difficult to compare them...

>The difference that I presented was between spending later
>under GST with deferral and spending later under GST without deferral.
>_Given the decision to spend later_, the government is giving up
>revenue by having a GST with deferral in place.  Otherwise,
>the GST regime (with or without deferral) makes no difference,
>granting that individuals do not earn interest exceeding the
>discount rate.

They're giving up revenue as compared with an income tax system.

With the not unreasonable assumption that individuals can invest and
receive better returns than their "cost of capital," the GST regime
rewards both the government AND the individual for wise investment.
Unwise investment similarly punishes both.  GST is thus essentially
neutral towards savings, except that if the government's capital cost
is lower than that of the individual (which is likely), it is actually
to the GOVERNMENT'S interest for the individual to invest.

Income tax schemes most definitely provide a disincentive to invest,
unless there is some way of deferring investment income.  This is why
"capital gains" are fairly popular, and why people buy real estate.

-- 
Christopher Browne                |     PGP 2.0 key available
cbbrowne@csi.uottawa.ca           |======================================
University of Ottawa              | Genius may have its limitations, but
Master of System Science Program  | stupidity is not thus handicapped.
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