A spatial analysis of provincial corporate income tax responses: evidence from Canada

Using a model of interdependent tax choices, and accounting for equalization entitlements and general transfers, this paper estimates – making use of a spatial econometric framework – corporate income tax‐setting functions for all Canadian provincial governments. The results show that there is a statistically significant positive fiscal interaction among a subset of provinces and between all provinces and the federal government. Provincial corporate income taxes are also found to be negatively related to equalization entitlements, general federal transfers, and the federal corporate income tax. A robustness check on the fiscal relationship between Ontario and Quebec verifies the existence of significant bi‐directional fiscal interdependencies. The paper also introduces U.S state corporate income taxes as covariates and examines their interaction with Canadian provinces.