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An Empirical Analysis of Intergovernmental Tax Interaction: The Case of Business Income Taxes in Canada

Masayoshi Hayashi and Robin Boadway
The Canadian Journal of Economics / Revue canadienne d'Economique
Vol. 34, No. 2 (May, 2001), pp. 481-503
Published by: Wiley on behalf of the Canadian Economics Association
Stable URL: http://www.jstor.org/stable/3131865
Page Count: 23
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An Empirical Analysis of Intergovernmental Tax Interaction: The Case of Business Income Taxes in Canada
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Abstract

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

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