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The Impact Of Tax Cuts On Economic Growth: Evidence From The Canadian Provinces

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  • Ferede, Ergete
  • Dahlby, Bev

Abstract

We examine the impact of the Canadian provincial governments’ tax rates on economic growth using panel data covering the period 1977–2006. We find that a higher provincial statutory corporate income tax rate is associated with lower private investment and slower economic growth. Our empirical estimates suggest that a 1 percentage point cut in the corporate tax rate is related to a 0.1–0.2 percentage point increase in the annual growth rate. Our results also indicate that switching from a retail sales tax to a sales tax that is harmonized with the federal value-added sales tax boosts provincial investment and growth.

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Bibliographic Info

Article provided by National Tax Association in its journal National Tax Journal.

Volume (Year): 65 (2012)
Issue (Month): 3 (September Citation: 65 National Tax Journal 563-94 (September 2012))
Pages: 563-94

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Handle: RePEc:ntj:journl:v:65:y:2012:i:3:p:563-94

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  1. Michael Bleaney & Norman Gemmell & Richard Kneller, 2001. "Testing the endogenous growth model: public expenditure, taxation, and growth over the long run," Canadian Journal of Economics, Canadian Economics Association, vol. 34(1), pages 36-57, February.
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  9. Mendoza, Enrique G. & Milesi-Ferretti, Gian Maria & Asea, Patrick, 1997. "On the ineffectiveness of tax policy in altering long-run growth: Harberger's superneutrality conjecture," Journal of Public Economics, Elsevier, vol. 66(1), pages 99-126, October.
  10. Barro, Robert J, 2000. " Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March.
  11. Padovano, Fabio & Galli, Emma, 2002. "Comparing the growth effects of marginal vs. average tax rates and progressivity," European Journal of Political Economy, Elsevier, vol. 18(3), pages 529-544, September.
  12. Hulten, Charles R, 1984. "Tax Policy and the Investment Decision," American Economic Review, American Economic Association, vol. 74(2), pages 236-41, May.
  13. Cullen, Julie Berry & Gordon, Roger H., 2007. "Taxes and entrepreneurial risk-taking: Theory and evidence for the U.S," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1479-1505, August.
  14. Jack Mintz, 1995. "Corporation tax: a survey," Fiscal Studies, Institute for Fiscal Studies, vol. 16(4), pages 23-68, November.
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  16. Smart, Michael & Bird, Richard M., 2009. "The Impact on Investment of Replacing a Retail Sales Tax with a Value-Added Tax: Evidence from Canadian Experience," National Tax Journal, National Tax Association, vol. 62(4), pages 591-609, December .
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