Income Shifting, Investment, and Tax Competition: Theory and Evidence from Provincial Taxation in Canada

19 Pages Posted: 11 Sep 2001

See all articles by Jack Mintz

Jack Mintz

University of Calgary - The School of Public Policy; CESifo (Center for Economic Studies and Ifo Institute)

Michael Smart

University of Toronto - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: August 2001

Abstract

We study corporate income tax competition when firms operating in multiple jurisdictions can shift income using financial planning strategies. Several such strategies, particularly intra-corporate lending, appear to be actively pursued by companies to reduce subnational corporate taxes in Canada. A simple theoretical model shows how interjurisdictional tax planning can give rise to asymmetries in jurisdictions' tax policies, with one jurisdiction becoming a "tax haven" to attract taxable income through financial transactions, while others set higher statutory rates. Further, increased competition from tax havens may paradoxically lead to tax increases by high-tax jurisdictions. Analysis of data from administrative tax records suggests income shifting has pronounced effects on provincial tax bases in Canada. According to our preferred estimate, the elasticity of taxable income with respect to tax rates for "tax shifting" firms is 4.3, compared to 1.6 for other, comparable firms.

JEL Classification: H2, H7

Suggested Citation

Mintz, Jack and Smart, Michael, Income Shifting, Investment, and Tax Competition: Theory and Evidence from Provincial Taxation in Canada (August 2001). Available at SSRN: https://ssrn.com/abstract=282317

Jack Mintz (Contact Author)

University of Calgary - The School of Public Policy ( email )

Calgary, Alberta
Canada
403-220-7661 (Phone)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Michael Smart

University of Toronto - Department of Economics ( email )

150 St. George Street
Institute for Policy Analysis
Toronto, Ontario M5S 3G7
Canada
416-978-5119 (Phone)
416-978-6713 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
384
Abstract Views
2,222
rank
91,802
PlumX Metrics