An empirical analysis of intergovernmental tax interaction: the case of business income taxes in Canada

Both federal and provincial governments in Canada levy corporate taxes on businesses in their jurisdictions, which potentially gives rise to horizontal and vertical tax externalities within the federation. Using a simple model of interdependent tax choices, we estimate tax-setting functions for the...

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Bibliographic Details
Published in:The Canadian journal of economics 2001-05, Vol.34 (2), p.481-503
Main Authors: Hayashi, Masayoshi, Boadway, Robin
Format: Article
Language:English
Subjects:
Average tax rate
Corporate income tax
Corporate income taxes
Corporate taxes
Economic models
Economic theory
Estimated taxes
Federal government
Federal taxes
Government
Income taxes
Provinces
Provincial government
Rates
Revenue sharing
Studies
Tax rates
Taxes
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Summary:Both federal and provincial governments in Canada levy corporate taxes on businesses in their jurisdictions, which potentially gives rise to horizontal and vertical tax externalities within the federation. Using a simple model of interdependent tax choices, we estimate tax-setting functions for the federal government, Ontario, Quebec, and an aggregate of the remaining eight provinces. We find evidence of significant vertical and horizontal tax interactions. Provincial tax rates respond negatively to the federal tax rate, while at least some provinces increase their tax rates in response to increases in the tax rates of other provinces. JEL Classification: H25, H7
ISSN:0008-4085
1540-5982
DOI:10.1111/0008-4085.00085