As Canadian policymakers grapple with revenue needs, fairness concerns, and compliance challenges, sales tax was addressed five times in the 2025 federal budget. This article examines one of the key sales tax topics mentioned in the 2025 federal budget, and the broader policy considerations that shape Canada’s future, namely, Canada’s marginal effective tax rate (METR) and the true competitiveness of Canada when it’s METR is the lowest in the G7, as claimed in the budget. Let us first, however, examine the historical sequential fiscal actions and events that brought Canada to the current economic status-quo. 

1. 1. What made Canada’s economy to be as it is today? 

The end of the World War II marked a defining transition for what people now call “capitalist economies.” Nations emerged from the conflict carrying unprecedented public debt, facing massive reconstruction demands, and confronting fundamentally altered political and economic realities. Over the next fifty years, the role of the state, the design of tax systems, and the model of economic governance underwent sweeping transformations. By the 1990s, these shifts culminated in widespread privatization and almost the global adoption of modern consumption taxes such as the goods and services tax (GST) and the value-added tax (VAT). Let’s go through this historical process phase by phase. 

1. 1.1. Post-war debt and state intervention 

At the end of World War II, Canada, along with the United States, the United Kingdom, and Western European countries, carried unprecedented national debt. Military production, wartime borrowing, and the collapse of private-sector investment had forced the Canadian government to take the lead in economic management. In 1945, the Canadian debt-to-GDP ratio was at 109%​ (Brethour 2020)​, while the U.S. debt-to-GDP ratio peaked at over 100%​ (Federal Rserve Bank of St. Louis 2025)​. Similar patterns existed in France, UK, and Australia. 

Rather than immediately cutting spending, the Canadian government used active fiscal policy to stabilize the economy, build infrastructure, and fund social programs. Major initiatives by the Canadian government at the time included social welfare programs (e.g. National Health Insurance Program, and Canada Pension Plan (CPP)), infrastructure development, and widespread housing construction. 

At the time, the Canadian liberal government pursued a policy marked by a focus on the expansion of the private sector and its integration with the United States economy, rather than a surge of nationalization like the UK, Australia, or France. The Canadian government sold off assets and applied Keynesian economic principles to create jobs and stimulate demand. Industries with government involvement included transportation, communication, energy and natural resources, and infrastructure. 

Economic growth during the post-war boom (1945–1973) helped Canada slowly reduce debt ratios through rising GDP rather than austerity. During these decades, Canada, and many capitalist economies, functioned as mixed systems: private enterprise remained robust, while the state owned or regulated key sectors. State ownership of many sectors kept the cost of essential factors of production relatively low, ensuring affordability, economic stability, competitive worldwide product prices, and premium quality products in many industries. 

2. 1.2. From public ownership to privatization 

Ill-advised on governments’ inefficiencies, however, privatization became a central policy tool in the commonwealth countries and USA. Canada, Australia, and New Zealand, for example, sold off airlines, utilities, and resource corporations. The primary period of large-scale privatization in Canada began in the mid-1980s under Prime Minister Brian Mulroney, influenced by the “neoliberal economic policies”. Major entities privatized during this later era included Air Canada, Petro-Canada (initiated under Mulroney, completed later), Canadian National Railways (CN), de Havilland Aircraft Co., and Canadair.  

The United Kingdom, under Margaret Thatcher, privatized almost everything: telecoms, energy, airlines, and rail services. The United States, under Ronald Reagan, deregulated the finance sector, transportation, and telecommunications. 

It was politically framed, backed with economic theory, to use privatization to eliminate government inefficiencies, reduce fiscal deficits, pay down debt, and promote market efficiency. The shift marked a significant ideological departure from post-war state-led economic management. This new economic model in the 1970s was labeled neoliberal economic philosophy, which promoted deregulation, reduced public spending, and privatization. While privatization increased prices of factors of production, it also drained governments’ sources of revenues. The end-result was indebted governments with no assets and with no sources of revenues, with exception to taxation emerging as the only remaining tool for governments to maintain public services and their commitment to welfare. 

3. 1.3. The rise and strain of income taxation 

Income tax became the backbone of modern capitalist tax systems after the fact that governments had sold all their assets. High-income taxation funded universal healthcare, pensions, unemployment benefits, and other social programs. This, nonetheless, had exhausted the traditional private sector, i.e. the businesses that were never owned by the government, and triggered the mounting pressure on the middle class. 

In the 1970s, however, critics argued that high income tax rates reduced investment incentives. This drove significant “reforms” including lower marginal tax rates and reduced corporate tax burdens. Consequently, by the 1980s and 1990s, many capitalist economies faced budget pressures. Other factors such as aging populations, rising healthcare costs, tax evasion, and attempting to maintain the same welfare level, had contributed to budget pressures. Clearly, while reluctant to print money with no actual GDP increase, governments had no other sources of revenues other than taxation, and while insisting on maintaining their spending level to protect their national welfare level, the “reforms” were not enough; a new stream of revenue must be “invented”. 

4. 1.4. The invention of modern sales tax 

One of the worst humanity inventions came into existence in the late 80s and early 90s and was named “value-added” tax. While classically governments taxed alcohol or tobacco products to deter their consumption, the 80s and 90s governments have decided to tax every productive economic activity: sales. This was parallel to injecting a virus at every economic transaction of an already troubled western economies. Economists commonly describe the virus as the tax deadweight loss, defined as the economic inefficiency caused by a tax. Sales taxes decrease the quantity of a commodity traded because they raise its price for consumers, causing some mutually beneficial transactions to no longer occur. The magnitude of the deadweight loss is determined by the price elasticity of demand and supply: the more elastic the curves, the larger the deadweight loss.