Blogs are opinion pieces and reflect their author’s views
Cutting Provincial Corporate Income Tax Rates to Promote Investment, Employment and Economic Growth
Raising taxes can come at a serious cost. Not just to the taxpayer, of course, but to the economy.
Every tax hike naturally leads people or companies to reallocate resources in ways that are less
productive, resulting in a loss of income-generating opportunities. At a certain point, raising taxes
becomes manifestly counterproductive, with the revenue lost due to the negative economic effects
outweighing any tax gains. In cases like that, a government would actually raise more money by
lowering taxes, broadening the tax base, than it does by increasing taxes.
In fact, an analysis of the tax-base elasticities of the provinces, using data from 1972 to 2010, reveals
that this very phenomenon is what occurred in Saskatchewan, which raised corporate taxes to a point
where it began to backfire, sabotaging the government’s goal of raising more revenue. It also occurred
in New Brunswick, Newfoundland and Labrador, P.E.I., and Nova Scotia. In all these provinces, tax
increases on corporate earnings actually ended up yielding less for the provinces than the provincial
governments would have collected had they instead lowered corporate income taxes.
In five other provinces, governments undermined their own provincial economies over the same
period, raising corporate taxes when they would have been better off actually cutting the corporate
income tax, and making up the difference with a revenue-neutral sales tax. Alberta, Ontario, British
Columbia, Manitoba and Quebec all paid dearly for the decision to hit corporations with higher taxes,
by sacrificing what could have been significant welfare gains had they sought to raise the same amount
of revenue through higher sales taxes (or in the case of Alberta, a new sales tax).
Quebec, at least, has lower tax-base elasticity than the others, however, possibly due to its unique cultural and linguistic
characteristics, which may make it somewhat less likely for people and investors to leave the province.