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A spatial analysis of provincial corporate income tax responses: evidence from Canada

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  • Sotiris Karkalakos
  • Christos Kotsogiannis

Abstract

. Using a model of interdependent tax choices, and accounting for equalization entitlements and general transfers, this paper estimates – making use of a spatial econometric framework – corporate income tax‐setting functions for all Canadian provincial governments. The results show that there is a statistically significant positive fiscal interaction among a subset of provinces and between all provinces and the federal government. Provincial corporate income taxes are also found to be negatively related to equalization entitlements, general federal transfers, and the federal corporate income tax. A robustness check on the fiscal relationship between Ontario and Quebec verifies the existence of significant bi‐directional fiscal interdependencies. The paper also introduces U.S state corporate income taxes as covariates and examines their interaction with Canadian provinces. A l'aide d'un modèle de choix fiscaux interdépendants, et en tenant compte des paiements de péréquation et des transferts généraux, ce texte calibre –à l'aide d'un cadre économétrique spatial – les fonctions de définition de fiscalité des revenus de sociétés de tous les gouvernements provinciaux canadiens. Les résultats montrent qu'il y a un effet d'interaction positif significatif entre un sous‐ensemble de provinces, et entre les provinces dans leur ensemble et le gouvernement fédéral. Les impôts sur le revenu des sociétés des provinces sont co‐reliés négativement avec les paiements de péréquation, les transferts généraux, et l'impôt fédéral sur le revenu des sociétés. Des tests de robustesse montrent qu'il y a relation d'interdépendance fiscale bidirectionnelle significative entre le Québec et l'Ontario. Le mémoire introduit les impôts sur le revenu des sociétés aux Etats‐Unis comme co‐variables et examine leur interaction avec ce qui se passe dans les provinces canadiennes.

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  • Sotiris Karkalakos & Christos Kotsogiannis, 2007. "A spatial analysis of provincial corporate income tax responses: evidence from Canada," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 40(3), pages 782-811, August.
  • Handle: RePEc:wly:canjec:v:40:y:2007:i:3:p:782-811
    DOI: 10.1111/j.1365-2966.2007.00431.x
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    Cited by:

    1. Dobra, John & Dobra, Matt, 2013. "State mineral production taxes and mining law reform," Resources Policy, Elsevier, vol. 38(2), pages 162-168.
    2. Petra Ens, 2009. "Tax competition and equalization: the impact of voluntary cooperation on the efficiency goal," Working Papers 2009/16, Institut d'Economia de Barcelona (IEB).
    3. Rizzo, Leonzio, 2007. "Interaction between vertical and horizontal tax competition: evidence and some theory," MPRA Paper 8632, University Library of Munich, Germany, revised 2008.
    4. Crivelli, Ernesto & Volpe Martincus, Christian, 2007. "Horizontal and Vertical Tax Externalities in a Multicountry World," Bonn Econ Discussion Papers 8/2007, University of Bonn, Bonn Graduate School of Economics (BGSE).
    5. Thiess Buettner & Robert Schwager & Sebastian Hauptmeier, 2011. "Efficient Revenue Sharing and Upper-Level Governments: Theory and Application to Germany," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 167(4), pages 647-667, December.
    6. Christos Kotsogiannis & Robert Schwager, 2006. "Fiscal Equalization and Yardstick Competition," Working Papers 2006-15, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
    7. Christos Kotsogiannis, 2010. "Federal tax competition and the efficiency consequences for local taxation of revenue equalization," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 17(1), pages 1-14, February.
    8. Christian Kelders & Marko Koethenbuerger, 2010. "Tax incentives in fiscal federalism: an integrated perspective," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 43(2), pages 683-703, May.
    9. Pantelis Kammas, 2011. "Strategic fiscal interaction among OECD countries," Public Choice, Springer, vol. 147(3), pages 459-480, June.
    10. Ergete Ferede & Bev Dahlby & Ebenezer Adjei, 2015. "Determinants of statutory tax rate changes by the Canadian provinces," Economics of Governance, Springer, vol. 16(1), pages 27-51, February.
    11. Ida, Tomoya & Wilhelmsson, Mats, 2014. "An Empirical Test Of The Dominant Tax Externality In Sweden," Working Paper Series 14/5, Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance.
    12. Kotsogiannis, Christos & Schwager, Robert, 2008. "Accountability and fiscal equalization," Journal of Public Economics, Elsevier, vol. 92(12), pages 2336-2349, December.
    13. Grazzini Lisa & Petretto Alessandro, 2015. "Federalism with Bicameralism," German Economic Review, De Gruyter, vol. 16(2), pages 138-160, May.
    14. Leonzio Rizzo, 2008. "Local government responsiveness to federal transfers: theory and evidence," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 15(3), pages 316-337, June.
    15. Petra Ens, 2009. "Tax competition and equalization: the impact of voluntary cooperation on the efficiency goal," Working Papers 2009/16, Institut d'Economia de Barcelona (IEB).
    16. Fredriksson, Per G. & Mamun, Khawaja A., 2008. "Vertical externalities in cigarette taxation: Do tax revenues go up in smoke?," Journal of Urban Economics, Elsevier, vol. 64(1), pages 35-48, July.
    17. Fredriksson, Per & Mamun, Khawaja, 2009. "Gubernatorial Reputation and Vertical Tax Externalities: All Smoke, No Fire?," Working Papers 2009002, Sacred Heart University, John F. Welch College of Business.
    18. Karkalakos, Sotiris & Makris, Miltiadis, 2008. "Capital Tax Competition in the European Union: Theory and Evidence from Two Natural Experiments," MPRA Paper 21437, University Library of Munich, Germany, revised 2010.
    19. Per G. Fredriksson & Khawaja A. Mamun, 2014. "Tobacco Politics and Electoral Accountability in the United States," Public Finance Review, , vol. 42(1), pages 4-34, January.
    20. William F. Fox & Brian C. Hill & Matthew N. Murray, 2015. "Vertical Competition, Horizontal Competition, and Mobile Capital," Public Finance Review, , vol. 43(4), pages 431-457, July.
    21. Yonghong Wu & Rebecca Hendrick, 2009. "Horizontal and Vertical Tax Competition in Florida Local Governments," Public Finance Review, , vol. 37(3), pages 289-311, May.
    22. Michael Keen & Kai A. Konrad, 2012. "International Tax Competition and Coordination," Working Papers international_tax_competi, Max Planck Institute for Tax Law and Public Finance.
    23. Ferede, Ergete & Dahlby, Bev, 2019. "The Effect of Corporate Income Tax on the Economic Growth Rates of the Canadian Provinces," SPP Technical Papers, The School of Public Policy, University of Calgary, vol. 12(29), September.

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    JEL classification:

    • H10 - Public Economics - - Structure and Scope of Government - - - General
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General

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