Lowering corporate taxes may be a good strategy for provincial governments, University of Toronto economists have found, because firms with subsidiaries in multiple jurisdictions are more likely to shift their profits to a province with lower tax rates.
"If there is a lot of income shifting that goes on, this suggests that when a government cuts corporate income tax rates, there won't be a big revenue loss because companies will move their profits into that province," says U of T economist Jack Mintz. "If governments raise corporate income taxes, they may not get as much revenue." Mintz is lead author of the study, Income shifting, investment and tax competition: theory and evidence from provincial taxation in Canada. Mintz adds that lowering provincial corporate income taxes may attract investment from foreign countries.
Using data from the Department of Finance, Mintz and co-author Professor Michael Smart of the Department of Economics analysed tax records of 900,000 Canadian firms from 1986 to 1999. The companies were divided into three groups: single firms operating only in one province, firms with subsidiaries in more than one province and firms that operate in multiple provinces that allocate their profits according to a formula set by the federal and provincial governments.
The researchers found that companies with subsidiaries in more than one province are able to shift income more easily to a province with lower taxes than firms that allocate their income across different jurisdictions or firms with only one location in a province. Subsidiaries within a company operate independently, Mintz says, so profits can be moved to a province with lower taxes and this, in turn, increases their revenues. Companies that follow the government-regulated allocation formula cannot do this as easily because they have to divide their profits into each of their divisions using specific calculations. The study will be published in the June issue of the Journal of Public Economics.
Source: Eurekalert & othersLast reviewed: By John M. Grohol, Psy.D. on 21 Feb 2009
Published on PsychCentral.com. All rights reserved.
Don't be too timid and squeamish about your actions. All life is an experiment. The more experiments you make the better.
-- Ralph Waldo Emerson