Cutting Provincial Corporate Income Tax Rates to Promote Investment, Employment and Economic Growth
6 Pages Posted: 5 Jul 2016
Date Written: March 1, 2016
This communiqué is based on the following paper: The Costliest Tax of All: Raising Revenue Through Corporate Tax Hikes can be Counter-Productive for the Provinces by Ergete Ferede and Bev Dahlby. Raising taxes can come at a high cost. Not just to taxpayers, of course, but to the economy. Every tax hike naturally leads people or companies to adjust their economic activities in ways that result in a reduction in investment, employment and economic growth. The loss of income-generating opportunities is the true cost of raising tax revenues. Econometric studies clearly demonstrate that corporate income taxes are far more sensitive to changes in the provincial tax rates than are personal income taxes or general sales taxes and result in greater economic losses per dollar of revenue raised. Furthermore, beyond a certain point, raising tax rates becomes counterproductive, with the revenue lost due to the negative economic effects outweighing any revenue gains through higher rates. In these situations, a government can actually raise more revenue by lowering tax rates than by increasing them.
The relationship between tax rates and tax revenues is known as the Laffer curve, named after Edward Laffer who famously drew this curve on a napkin in a Congressional dining room in Washington to demonstrate how a tax rate reduction could raise additional revenues if tax rates exceed a critical level. The Laffer curve is usually portrayed as an inverted U shape and if the tax rate exceeds the point where tax revenues are a maximum, then a tax rate cut can increase tax revenues. In such cases, we say that the government is on the “wrong side” of the Laffer curve.An analysis of the responsiveness of provincial tax bases to tax rates by Ferede and Dahlby (2016) reveals that this has occurred in Saskatchewan. The province has raised corporate taxes to a level where it has eroded the corporate tax base.
Keywords: corporate income tax rates, CorporateTax Hikes
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