The Effect of Corporate Income Tax on the Economic Growth Rates of the Canadian Provinces

This paper provides an empirical estimation of the effects of provincial corporate tax rates on economic growth using annual panel data from Canadian provinces over the period 1981-2016. Our empirical approach enables us to investigate the long-run relationship between provincial tax rates and economic growth by allowing short-run dynamics to vary across provinces. We find that a reduction in the provincial CIT rate has a statistically significant positive effect on economic growth rate. Based on our preferred specification of the econometric model, a one percentage-point reduction in a provincial government’s statutory CIT rate increases the growth rate by 0.12 percentage points four years after the initial CIT rate cut and increases real per capita GDP by 1.2 per cent in the long run. The results are robust to various sensitivity checks. These results are consistent with the empirical estimates in our previous study of Ferede and Dahlby (2012), who used a different econometric methodology and sample period. They are also broadly consistent with the findings of recent empirical studies of the impact of corporate income taxes on the economic performance of U.S. states. In a companion communiqué, we use the econometric results to estimate the increase in Alberta’s growth rate from the Alberta government’s announced reduction in the provincial CIT rate from 12 per cent in 2018 to eight per cent in 2022.