THE IMPACT OF TAX CUTS ON ECONOMIC GROWTH: EVIDENCE FROM THE CANADIAN PROVINCES

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.