Raising an extra dollar of business income tax revenue costs the Ontario economy $1.66

By Ergete Ferede, Professor of Economics at MacEwan University. From The Fraser Institute.

How Costly Are Corporate Income Taxes in the Short Run?

• Corporate income tax (CIT) is an important source of revenue for Canadian provinces, and governments often increase CIT rates to address budgetary pressures.
• Higher CIT rates can reduce productivity and discourage investment and business activity, creating broader economic costs beyond the revenue generated. The marginal cost of public funds (MCPF) helps assess these trade-offs by measuring the economic cost of generating an additional dollar of tax revenue.
• This study estimates the short-run MCPF for provincial CIT in four major provinces: British Columbia, Alberta, Ontario, and Quebec. The analysis first focuses on investigating how sensitive the CIT base is to changes in tax rates.
• Results show that a one percentage-point increase in the CIT rate reduces the tax base by 4.82% in British Columbia, 4.00% in Alberta, 3.47% in Ontario, and 3.10% in Quebec.
• Using these estimates, the study then computes the short-run MCPF as follows: 2.37 for British Columbia, 1.47 for Alberta, 1.66 for Ontario, and 1.55 for Quebec. This suggests that raising one additional dollar of CIT revenue costs the economy $2.37 in British Columbia, $1.47 in Alberta, $1.66 in Ontario, and $1.55 in Quebec. The results highlight significant differences across provinces, with British Columbia facing the highest economic cost.
• A key policy message is that a higher CIT rate can be an inefficient way to raise revenue. Policy makers should weigh these economic costs against fiscal needs and long‑term goals such as improving investment, productivity, and growth. Greater reliance on less distortionary taxes may reduce economic costs while supporting fiscal sustainability.