By: Hayley Chazan

Twenty-five years after Brian Mulroney’s government implemented the Goods and Services Tax (GST), economists and politicians agree that the tax – long abhorred by consumers – has achieved its intended outcome of increasing competition for Canadian manufacturers.

But tax experts and industry say that the GST is only one factor that affects competitiveness.  They say that in today’s globalized market, other tax incentives for Canadian manufacturers should be implemented in order to encourage investment.

In the 1990s, the government undertook major tax reform to replace a 13.5 per cent Manufacturers’ Sales Tax (MST) with the GST.

The MST was a tax placed on manufactured goods produced in Canada.  Manufacturing companies incurred the tax each time they purchased machinery.  This drove up prices and placed Canadian manufacturing exporters at a competitive disadvantage.

The GST intended to remedy this by taxing consumers directly.  Any tax incurred elsewhere in the production chain would be recoverable through tax credits.

But the GST became a political nightmare, mostly because it was so noticeable to the taxpayer.

“We tried to do ads showing that many products would be cheaper under the GST,” said Senator Marjory LeBreton, Mulroney’s deputy chief of staff at the time.  “But all Canadians could understand was that they would have to pay seven more cents on every dollar.”

Because Mulroney had a majority government, the GST quickly passed in the House of Commons.  But the Liberal-dominated Senate, refused to pass the tax into law.

Using a rare tactic that required special permission from the Queen, Mulroney appointed eight additional senators, giving the Conservatives a loose majority in the upper chamber.  The GST passed on Dec. 13, 1990, by a vote of 55-49 after an 11-week filibuster.

CBC Digital Archives

“The biggest challenge for the Liberal Senate caucus was finding ways to make a filibuster work,” longtime Liberal Senator Colin Kenny recalled.  “At one point, Senator Hastings collapsed in the middle of his speech.  It was very dramatic.”

Despite Liberal opposition, Kenny now acknowledges that the GST is smart policy.  Consumption taxes accounted for 11.4 per cent or $31 billion worth of government revenue in the 2013-2014 federal budget.  Kenny said that this revenue source provides stability to government in bad times.

In 2008, the Harper government lowered the GST from seven per cent to five per cent.  At the time, Brian Mulroney called the tax cut “good politics, but bad policy” because it cost the government nearly $14 billion in revenue.

Twenty-five years later, experts like Carleton economics professor Frances Woolley and Montreal tax expert Martin Gilbert agree that Canadian manufacturing exports are more competitive than they would have been without the GST.

Industry groups also applaud the GST.

“Value added taxes, in general, allow Canadian manufacturing companies to invest in machinery without the burden of taxation,” said Mike Holden, director of policy and economics at Canadian Manufacturers and Exporters (CME).

But Woolley questioned whether or not the switch to the GST has been enough to allow Canadian manufacturers to compete successfully in a globalized market.

“The GST is just one factor of Canadian competitiveness,” said Gilbert.  “If tax authorities from other countries decide to offer incentives to boost their respective economies, there might not be much Canadians can do.”

Holden said that progress is needed to ensure that the Canadian manufacturing industry remains competitive.  The CME said that compared to the US, Canadian manufacturing companies are too small to invest in new facilities and equipment that is critical to their long-term success.

A tax incentive Holden said could help encourage investment is the Scientific Research & Experimental Development (SR&ED) credit.  The SR&ED provides a tax break to small manufacturers for eligible research and development completed in Canada, but Holden said the SR&ED has been cut in recent years.

“The tax system has the potential to play a strong role in encouraging investment in the Canadian manufacturing industry,” Holden said.

Documentation:

1990: Mulroney stacks Senate to pass the GST

This is a CBC news package with Peter Mansbridge from 1990 that aired the day the Queen granted the Mulroney government permission to appoint eight additional senators.  I found it online using CBC’s digital archive.  This was the first source I consulted when trying to decide on a topic.  The video was helpful because it gave me a good sense of the chain of events that unfolded on the day the GST was passed.  It provided a good explanation of the opposing viewpoints of both the Mulroney government and the Liberal senators.

Partial transcript from interview with Senator Marjory LeBreton

This is a partial transcript from a 13-minute interview I conducted over the phone with Senator Marjory LeBreton on Feb. 24, 2015.  I was able to arrange the interview by sending an e-mail to Senator Lebreton’s administrative assistant, Louise Haddock on Feb. 12, 2015.  I obtained Ms. Haddock’s contact information on the Parliament of Canada website.  When I started my research, I found it difficult to understand why Canadians were so reluctant to accept the GST, especially since it made good economic sense and would save them money.  This partial transcript addressed this issue.  It provided me with a clearer understanding of why Canadians couldn’t wrap their heads around the benefits of the GST.