Canada's Value-Added Tax : Its History and Effects on Income Inequality

Abstract

This research seeks to analyze the correlation between the Goods and Services Tax (GST), a Value-Added Tax (VAT) in Canada, and income inequality within the country. In 1991, Canada introduced the GST at a rate of seven percent, and in the following years the country's Gini coefficient (a measure of income inequality) rose as well. In 2006 and 2008, the federal government reduced the rate of the GST to six and five percent respectively, and the Gini coefficient has remained relatively stagnant since that time. Dissecting whether this is simply a spurious correlation or a case of cause-and effect requires the historical, statistical, and economic analysis present in this research. Using a variety of macroeconomic variables, a statistical analysis was performed that aimed to answer two questions. First, "was the introduction of a VAT in Canada V significantly correlated with the rise in income inequality within the country?" Second, "have the changes in Canada's VAT been significantly correlated with income inequality within the country?" The results show that the introduction of a VAT did have a statistically significant correlation with the level of income inequality in Canada, but changes in the VAT's rate did not. The results also showed that among the macroeconomic variables included in the statistical analysis, manufacturing employment as a percentage of overall employment was the most statistically significant. There are valid historical reasons why this may be a causal relationship, and further research into the area is recommended.