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The Incidence of the Corporate Income Tax on Wages: Evidence from Canadian Provinces

Kenneth McKenzie and Ergete Ferede ()

SPP Research Papers, 2017, vol. 10, issue 7

Abstract: This paper investigates the effect of the corporate income tax (CIT) on wages using panel data for Canadian provinces. We find that the CIT has a statistically significant negative effect on wages through its adverse impact on the capital/labour ratio. The empirical results suggest that workers bear a significant part of the corporate tax in the form of lower wages. Under the standard assumption that the CIT base is unresponsive to changes in the tax rate, our estimates suggest that the reduction in aggregate wages associated with a $1 increase in provincial corporate tax revenue due to an increase in the statutory CIT rate ranges from 95 Canadian cents for Newfoundland and Labrador to C$1.74 for New Brunswick. Under the more reasonable assumption that the CIT base shrinks in response to an increase in the tax rate, the estimates range from C$1.52 for Alberta to C$3.85 for Prince Edward Island. The results are robust to various sensitivity checks.

Date: 2017
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