What are the economic costs of raising revenue by the Canadian federal government?
income tax, federal governments
Personal and corporate income taxes are important sources of revenue for the Canadian federal government, accounting for 72 percent of its total tax revenue in 2020–2021. This study investigates the economic costs of raising revenue through the federal personal income tax (PIT) and corporate income tax (CIT). We begin by estimating a measure of the tax sensitivities of the CIT and PIT bases based on data from 1972 to 2019. The econometric model indicates that a one percentage point increase in the federal CIT rate is associated with a 3.36 percent reduction in the CIT base, and a one percentage point increase in the top federal marginal PIT rate is associated with a 1.97 percent decline in the PIT base in the long run. Our estimates of the tax sensitivity of the tax bases are generally consistent with the findings of previous studies, and in particular that the CIT base is more responsive to tax rate changes than the PIT base. We also compare our estimates of the tax sensitivity of the federal PIT and CIT bases with the estimates of the tax sensitives of the provincial tax bases in Dahlby and Ferede (2018). As anticipated, the federal tax bases are much less tax sensitive than the provincial bases, especially in the case of the CIT, because it is easier to shift taxable income or re-allocate investments across provincial boundaries than across international boundaries.
Dahlby, B. and Ferede, E. (2022). What Are the Economic Costs of Raising Revenue by the Canadian Federal Government? The Fraser Institute. https://www.fraserinstitute.org/studies/what-are-the-economic-costs-of-raising-revenue-by-the-canadian-federal-government
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