The Treatment of Transfers in the Measurement of Sales Tax Incidence: the Case of Canada's Manufacturers' Sales Tax

Abstract

The purpose of this article is twofold: to determine the appropriate treatment of the Abstract indexation of transfer payments in sales tax incidence and to apply the methodolog ical results to measure the incidence of Canada's Manufacturers'Sales Tax (MST). The article argues that, when measuring sales tax incidence in the presence of transfers, appropriate adjustments must be made only for the actual degree to which transfers are indexed. The article suggests that the effects of full or partial indexing are measured correctly by treating indexing as a negative tax. This adjustment is made automatically by using a distributional measure of incidence based on a comparison of pretax and posttax income. The empirical results indicate that when indexing of transfers is ignored, the MST is mildly regressive. When partial indexing is included and treated as a negative tax, the MST is progressive at the lower end of the income scale, but remains regressive at the top end.