steel maker, the steel then sold to an appliance manufacturer, and the
washing machine sold to a retailer and then to a consumer. The example
makes the simplifying assumption that no produced inputs are used in the
mining operation (so that the value of the iron ore is all value added); at
all further stages, however, the use of produced inputs makes the firm’s
value added less than the value of output at that stage. The steel maker’s
value added is $200, and its tax is thus $10; $15 on the total value of its
output less the $5 credit on the taxes already paid to the mine on the
value of the iron ore. Total taxes paid equal $30, which is 5 percent of the
$600 value of the final product; each firm pays 5 percent of its share in
creating that $600 value.
Since the GST applies to expenditure rather than to income, it is mildly
regressive, because the proportion of income saved, and hence not taxed,
rises with income. This regressivity is reduced, however, by exempting
food and, more importantly, by giving low- and middle-income
households a refundable tax credit, which individuals receive through
quarterly cash payments. For the lowest-income households, the GST is a
progressive tax because the refundable tax credit exceeds the value of
GST that they would pay even if they spent all of their incomes on taxable
commodities.
Property Taxes
The property tax is the most important source of revenue for Canadian
municipalities, but it is quite different from the taxes we have discussed
so far. Personal and corporate income taxes and expenditure taxes are all
related to an actual transaction (earning income or making a purchase)
whereas a property tax applies to the value of owned property.