Do We Care? A Study of Canada's Indirect Tax System

This paper builds on the optimal taxation literature of Diamond and Mirrlees (1971), Ahmad and Stern (1984), and Christiansen and Jansen (1978). Using ethically defensible measures of social welfare, the effective redistribution due to the Canadian indirect tax system is measured and directions of welfare enhancing tax reform are uncovered. Using micro-data from the Family Expenditure Survey, this study finds that, surprisingly, the existing Canadian indirect tax system is neither progressive nor regressive, rather, the implicit government preferences (as reflected in the indirect tax system) show no aversion to cross-class income inequality.