Corporate Tax Hikes Reduce Tax Revenues in Canada

March 17, 2016 Taxation in Canada

Tax in CanadaCALGARY – New research from Canada indicates that increasing the rates of personal income tax and sales tax is a more efficient means of improving tax revenues then raising corporate income tax.

Hiking the rate of corporate income is not a guaranteed way to raise tax revenues, and severe increase could actually result in reduced tax collections and flagging economic activity, according to the results of a study released by the University of Calgary on March 16th.

The new research is based on the historic relationship between the rate of corporate income tax set by provincial tax authorities in Canada, the resulting change in the tax revenues collected, and the economic output of the province over the years between 1972 and 2010.

It was shown that while some hikes to the rate of corporate income tax have result in an increased tax take, raising taxes too far has demonstrably lead to diminishing returns or even reductions in tax revenues.

The researches claimed that in many cases the hike to the corporate income tax rate should have been replaced with a tax cut for businesses and a hike in the rate of personal income taxes and sales taxes.

To back up their findings, the researchers calculated the elasticities of all major tax types in Canada, and showed that in all provinces changes to corporate income tax rate will always elicit a greater response then changes to the rate of sales tax or personal income tax.

Photo by: Diego Torres Silvestre