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

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  • Masayoshi Hayashi
  • Robin Boadway

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.

Suggested Citation

  • Masayoshi Hayashi & Robin Boadway, 2001. "An empirical analysis of intergovernmental tax interaction: the case of business income taxes in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 34(2), pages 481-503, May.
    • Handle: RePEc:cje:issued:v:34:y:2001:i:2:p:481-503
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    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations

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