Report -- Conference Board Tax Impacts

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The Impact of Tax Measures on Ontario’s

Economy

Briefing

Prepared for: PROGRESSIVE CONSERVATIVE CAUCUS OF ONTARIO

Prepared by:

THE CONFERENCE BOARD OF CANADA

March 2013

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Table of Contents Preface .......................................................................................................................................................... 3

Introduction .................................................................................................................................................. 4

Methodology and Key Assumptions ............................................................................................................. 4

Findings ......................................................................................................................................................... 5

Impact of a 1 Per Cent Reduction to Personal Income Tax Revenues ...................................................... 5

Impact of a 1 Per Cent Reduction to Corporate Income Tax Revenues ................................................... 8

Conclusion ................................................................................................................................................... 12

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Preface This research was undertaken by The Conference Board of Canada (CBoC) for the Progressive

Conservative Caucus of Ontario. In keeping with Conference Board guidelines for financed research, the

design and method of research, as well as the content of this study, were determined solely by the

Conference Board. The research was conducted by Pedro Antunes, Director, and Matthew Stewart,

Principal Economist, at the Board’s National and Provincial Forecast group.

About The Conference Board of Canada

The Conference Board of Canada is the foremost independent, not-for-profit applied research

organization in Canada. We help build leadership capacity for a better Canada by creating and sharing

insights on economic trends, public policy issues, and organizational performance. The Board’s

Economic Forecasting and Analysis division employs more than 25 professional economists, who bring

together knowledge across regions and sectors in producing their forecasts. The forecasting group

constructs and maintains econometric models of the national and regional economies and a one-of-a-

kind, comprehensive quarterly database of the provincial economies in Canada. The Conference Board

of Canada was established in 1954, and is affiliated with the U.S.-based The Conference Board, Inc. that

serves some 3,000 companies in 67 nations.

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Introduction This research project relied on the Conference Board’s proprietary model of Ontario’s economy to

assess the economic and fiscal implications of declines in personal income taxes and corporate income

taxes in the province. The model simulations were performed over a relatively long horizon (10 years) in

an effort to capture the full economic benefits that can be linked to improved competitiveness and

increased private capital formation from lower tax rates. It is important to note that the Board’s model

is based on historical relationships in the economy, and these can vary in the future. Still, model

simulations provide a solid methodology to help us understand, in isolation, the effect of various policy

levers on a wide range of economic indicators.

The model simulation captures not only the direct impact on households and business of reducing tax

rates but also the supply-chain impacts related to a lift in consumption or investment. Additionally, the

model quantifies the impact that increases in private capital have on Ontario’s potential output and

future production.

Methodology and Key Assumptions The simulations were performed using the Conference Board’s Ontario economic model, using the

Board’s latest long-term forecast as the backdrop (the control scenario). The first simulation (or shock)

was based on a permanent reduction in personal income taxes, equivalent to 1 per cent of personal

income tax revenues. Similarly, the second shock forced a reduction in corporate income taxes

equivalent to 1 per cent of the corporate tax revenue stream in the control scenario. The initial hit to

personal and corporate income taxes has been arbitrarily chosen to establish the relative economic

impacts of these measures.

The analysis evaluates the combined direct, indirect, and induced economic impacts, where:

Direct impact can be thought of as the first-round impacts of increasing after-tax income to

households or firms which will then lead to increased spending on consumption (in the case of

households) or capital investment (in the case of firms). Not all of the increase in after-tax income

is spent, depending on households’ and firms’ propensity to spend the additional income.

Moreover, the impact on the economy can be muted by the share of household spending or

business investment that is used to purchase imported goods or equipment. These are known as

leakages associated with the direct spending.

Indirect impact (or supply chain impact) measures the value added that the direct impact

generates economically through demand for intermediate inputs or other support services. For

example, increased business investment in structures will lift demand for utilities, transportation,

and financial and insurance services. Similarly, increased consumer spending will boost wholesale

trade, transportation, and manufacturing depending on where the goods are produced.

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Induced impacts are derived when employees of the directly and indirectly affected industries

spend their earnings and owners spend their profits. These purchases lead to more employment,

wages, income, and tax revenues, and can be felt across a wide range of industries.

Thus, household spending or business investment induced by the tax cuts will not only have direct

impacts on the economy (on retail sales or construction, for example) but will also spread through the

economy through a series of multiplier effects. Supply chain effects are first felt on demand for

industries that are direct suppliers. Second-round induced effects produce a widespread impact (albeit

usually smaller) on all sectors of the economy, largely through a general increase in consumer spending.

It is important to note that the initial constant dollar reduction in tax revenues does not necessarily

result in a one-to-one increase in real GDP. This is because of the leakages associated with savings,

imports, and taxes from the direct and supply chain effects. The Conference Board’s provincial

forecasting model captures the sum of the direct, indirect, and induced impacts on Ontario’s economy,

based on its estimated historical relationships. The model incorporates a detailed modelling of prices,

households, and businesses and provides economic impact results for a wide range of economic

indicators.

Some key points and assumptions about the methodology are worth mentioning. The Conference

Board’s Ontario forecasting model contains only a partial accounting of government revenues (including

direct and indirect tax revenues). In addition, government accounts in the Conference Board’s Ontario

models are based on national accounts data and not on the public accounts. In principle, one can

assume that the impact of the shock on a national account and public account basis would be similar.

The model simulations are based on the premise that the reduction in government revenues associated

with the provincial tax cuts are financed through increased public debt. We do not attempt to quantify

the potential benefits of additional public savings (should the funds not have been spent) or of alternate

spending.

Moreover, we make the assumption that over the medium term, Ontario’s economy is not at its full

potential. Thus, the shocks have only small effects on costs and prices, which are assumed to be too

small to have an impact on monetary policy or the value of the currency.

Findings

Impact of a 1 Per Cent Reduction to Personal Income Tax Revenues

This model simulation essentially captured the impact of cutting Ontario’s personal income tax revenues

by 1 per cent over 2013 to 2022, a 10-year simulation horizon.1 The permanent 1 per cent reduction is

applied to a growing tax base in the control scenario and thus the dollar value of the shock increases

1 The 1 per cent has been arbitrarily chosen to establish the multiplier effects of such a policy measure. In general

impacts are linear, such that doubling the income tax cut would lead to roughly doubling the economic impacts.

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over time. In 2013, households would receive an additional $313 million in after-tax income, growing to

$497 million by 2022—a cumulative $4 billion in current dollars over the 10 years of the shock. (See

Chart 1.) Adjusting for inflation, this represents a cumulative hit to government personal income tax

revenues of $3 billion in 2002 dollars.

The increase in real household after-tax income flows through the economy by first lifting household

spending and savings. And the impacts spread—lifting imports (or leakages) and, eventually, business

investment as firms react to the permanent increase in demand. The boost to business investment helps

to lift Ontario’s productive capacity, modestly, over the long term, suggesting that potential output is

boosted permanently in comparison to the control scenario.

Table 1 summarizes the impact of lowering personal income tax revenues by 1 per cent on components

of real GDP by spending category. The direct impact of the shock shows up as a boost to real household

spending and the increase in economic activity has a modest but growing impact on private investment,

especially machinery and equipment. However, the high import content associated with consumer

spending and private investment represents a leakage that offsets the overall impact on Ontario’s

economy. As a result of this extra demand, real imports increase by a cumulative $2.4 billion from 2013

to 2022, dampening the total impact on real GDP. Over time, the increase in private capital investment

lifts Ontario’s productive capacity, providing a modest boost to net exports that helps solidify the impact

on overall GDP. Residential investment is boosted by the increase in population, as interprovincial

Chart 1: Initial Value of Personal Income Tax Reduction

(millions of current and constant dollars)

Source: The Conference Board of Canada.

250

275

300

325

350

375

400

425

450

475

500

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Current $

2002 $

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migration is affected by job seekers. However, real government spending on goods and services is

unaffected because of offsetting effects—more people in the province would generally boost demand

for government services but, at the same time, stronger job creation should lower spending on social

programs.

Table 2 shows the impact of the simulation on Ontario’s key economic indicators. The lift to consumer

spending will have widespread and growing impacts on Ontario’s economy. Over the simulation horizon,

the contribution to real GDP—including direct, indirect, and induced impacts—grows from $129 million

in 2013 to $242 million in 2022. Similarly, the number of jobs supported by the tax reduction increases

from about 1,500 to nearly 2,800—on a cumulative basis, roughly 21,700 person-years of employment is

created.

Table 1: Personal Income Tax Shock—Ontario Real GDP Expenditure BasedLevel difference shock minus control except where otherwise indicated

(millions of 2002 $, market prices) 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Consumer expenditures 187 258 280 296 313 331 351 374 398 424 3,212

Government spending on goods and services 0 0 0 0 0 0 0 0 0 0 0

Gross fixed capital formation 38 42 46 45 45 43 41 39 37 34 410

Government 0 0 0 0 0 0 0 0 0 0 0

Business 39 43 46 46 46 44 43 41 39 35 422

Residential construction 27 26 27 27 26 25 24 22 20 18 243

Non-residential construction 1 2 2 2 3 3 3 3 4 4 27

Machinery and equipment 5 10 13 13 13 13 14 14 15 16 126

Final domestic demand 218 290 316 331 347 364 382 403 424 445 3,522

Exports 2 7 14 21 28 36 45 54 64 75 345

Imports 104 171 207 227 241 254 267 281 296 312 2,361

Net exports -102 -165 -194 -206 -213 -218 -222 -227 -232 -237 -2,016

Gross domestic product at market prices 129 148 150 154 164 177 192 208 225 242 1,787


Cummulative

total

Table 2: Personal Income Tax Shock—Ontario Key Economic Indicators

Level difference shock minus control except where otherwise indicated

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Value of 1% reduction in PIT on control (millions of current $) 313 331 348 367 388 406 427 449 473 497 3,999

Value of 1% reduction in PIT on control (millions of constant 2002 $) 257 266 275 285 297 306 316 328 339 351 3,020

Real GDP at market prices (millions of constant 2002 $) 129 148 150 154 164 177 192 208 225 242 1,787

GDP at market prices (millions of current $) 175 223 257 303 367 444 536 642 761 893 4,600

Consumer price index (percentage difference) 0.00 0.00 0.01 0.01 0.01 0.02 0.03 0.03 0.04 0.05

Personal income (millions of current $) 72 93 108 125 149 177 211 250 295 344 1,825

Personal disposable income (millions of current $) 369 403 431 464 504 544 592 645 705 768 5,425

Retail sales (millions of current $) 77 130 165 187 210 236 265 299 338 380 2,289

Housing starts 96 133 159 176 193 210 228 247 267 289 1,998

Corporate profits (millions of current $) 56 57 60 73 94 124 160 202 249 302 1,378

Population of labour force age 8 25 50 85 125 177 238 310 398 497 7,250

Labour force 965 1,145 1,186 1,219 1,280 1,347 1,428 1,520 1,610 1,702 13,401

Employment 1,533 1,832 1,912 1,975 2,080 2,192 2,327 2,477 2,629 2,780 21,735

Unemployment rate (level difference in rate) -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 -0.01

Total indirect taxes (millions of current $) 34 52 62 71 80 91 103 117 133 151 894

Provincial indirect taxes (millions of current $) 17 26 31 35 39 44 50 57 64 73 436

Federal personal income tax collections (millions of current $) 7 9 10 12 14 16 20 23 27 32 169

Provincial personal income tax collections (millions of current $) -309 -325 -342 -360 -379 -396 -414 -434 -455 -476 -3,889

Corporate income tax collections (millions of current $) 12 13 14 17 22 28 36 46 56 69 312

Provincial corporate income tax collections (millions of current $) 4 4 5 6 8 10 13 17 21 25 112

Total provincial revenue impact (millions of current $) 25 35 42 48 56 65 76 89 103 120 658


Cummulative

total

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The overall economic multiplier can be calculated as the increase in real GDP associated with the

original hit to personal income tax revenues. Because of the growing effects of the shock, we find that

the economic multiplier increases from about 0.50 in 2013, the first year of the shock, to 0.69 by 2022.

On average, over the 10-year simulation period, for every $100 million in real personal income tax

reduction, real GDP is boosted by $59.2 million and 719 person-years of employment are created. In

other words, for each $100 million in real personal income tax reduction, 719 jobs will be created for

one year.

A permanent 1 per cent cut in personal income taxes supports, on average, about 2,173 jobs per year.

Table 3 highlights the job creation by major industry with services employment benefiting from the

lion’s share of job creation while supply-chain effects also boost job creation among goods-producing

industries. The jobs created are filled by a reduction in the number of unemployed and a boost to the

labour force through an increase in participation rates and population. Population increases because a

boost to economic activity in Ontario has a positive impact on net interprovincial migration. This results

in a boost to housing demand and residential construction.

The boost to economic activity results in an increase in income and, with the exception of provincial

personal income taxes, a boost to tax revenues. Over the 10-year forecasts horizon, indirect taxes are up

by a cumulative $894 million while corporate income taxes are up by a cumulative $312 million (these

include all levels of government). Federal personal income tax collections are up by a cumulative $169

million. On the other hand, provincial income tax collections suffer a net loss of just under $3.9 billion.

This suggests that over the long term, out of a $4-billion cut to personal income tax, the provincial

government stands to recoup roughly $110 million in second-round personal income tax collections.

Additional tax revenues from corporate and indirect taxes suggest that second-round provincial tax

revenues cumulate to a total $658 million over the 10-year period.

Impact of a 1 Per Cent Reduction to Corporate Income Tax Revenues

The second simulation looked at the impact of cutting taxes on corporations rather than on households.

In this case, we reduce Ontario’s corporate income tax revenues by 1 per cent in comparison to the tax

base in the control scenario over 2013 to 2022. The growing tax base in the control scenario suggests

Table 3: Personal Income Tax Shock - Ontario Labour Market


2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Total employment 1,533 1,832 1,912 1,975 2,080 2,192 2,327 2,477 2,629 2,780 21,735

Primary sector 23 48 64 70 73 73 74 73 73 73 644

Manufacturing 45 49 42 54 56 62 71 82 92 103 658

Construction 129 166 204 211 215 209 203 195 187 177 1,896

Utilities 13 16 16 17 18 20 22 23 25 27 198

Services 1,323 1,552 1,585 1,621 1,717 1,827 1,957 2,104 2,251 2,400 18,338

Unemployment -569 -687 -726 -756 -800 -845 -898 -958 -1,018 -1,078 -8,334

Source: The Conference Board of Canada

Cumulative

Total

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that the dollar value of the shock increases over time. In 2013, after-tax corporate profits are boosted by

$532 million, growing to $850 million by 2022—a cumulative $7 billion in current dollars over the 10

years of the shock. This is equivalent to $5.3 billion in inflation-adjusted terms, in 2002 dollars.

The increase in after-tax profits has the direct effect of lifting business investment on both machinery

and structures. The lift to economic activity also bolsters employment and household spending but,

more importantly, the increase in private capital lifts Ontario’s productive capacity over the long term.

In comparison to the personal income tax cut simulation, the boost to potential output is much more

important in this simulation relative to the size of the tax cut. This is because the increase in investment

is the primary response from the shock, whereas in the first shock, the reduction in personal income tax

lifts private investment but only as a secondary effect when businesses react to an increase in domestic

demand.

Table 4 presents the impact of the simulation on real GDP by expenditure component. With the

reduction in taxes, corporation add to their capital investment budgets for both machinery and

equipment and structures. Leakages occur because of the heavy import content in machinery and

equipment investment and because of corporate savings, as not all of the initial increase in after-tax

profits is spent on new capital. Overall, real business investment is boosted by a cumulative $1.7 billion

over the 10-year simulation horizon. A portion of corporate savings does flow, through dividend

payments, to households. Thus, household spending is also up, but less so than in the first simulation, in

reaction to the increase in dividends and to higher economic activity and job creation. Over time, the

increase in Ontario’s potential output helps lift exports, resulting in net trade eventually contributing

positively to the economy and boosting the impact of the tax reduction on GDP. Overall, the impact on

real GDP—including direct, indirect, and induced impacts—grows from $176 million in 2013 to $504

million in 2022.

Table 5 summarizes the impact on Ontario’s key economic indicators. The number of jobs supported by

the tax reduction increase, from about 2,100 to nearly 5,900 over the 10 years of the shock—on a

cumulative basis, roughly 42,800 person-years of employment are created. And, as in the personal

income tax simulation, the jobs are filled by reducing the number of unemployed, raising labour force

Table 4: Corporate Income Tax Shock—Ontario Real GDP Expenditure BasedLevel difference shock minus control except where otherwise indicated

(millions of 2002 $, market prices) 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Consumer expenditures 93 137 161 175 186 199 213 227 239 252 1,881

Government spending on goods and services 0 0 0 0 0 0 0 0 0 0 1

Gross fixed capital formation 131 151 171 175 176 185 196 205 212 222 1,824

Government 0 0 0 0 0 0 0 0 0 0 0

Business 133 153 174 178 179 188 200 209 216 227 1,857

Residential construction 17 24 31 35 39 43 47 51 55 60 402

Non-residential construction 28 31 33 32 31 31 33 33 33 34 320

Machinery and equipment 111 123 135 135 133 138 145 150 155 162 1,386

Final domestic demand 217 280 323 341 353 375 400 423 442 464 3,618

Exports 27 70 112 150 182 211 237 262 284 304 1,838

Imports 74 133 169 191 204 216 229 242 254 265 1,976

Net exports -47 -63 -57 -41 -22 -5 8 20 30 39 -138

Gross domestic product at market prices 176 226 275 308 338 374 412 446 474 504 3,532


Cummulative

total

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participation, and interprovincial migration. The latter has an impact on boosting population and

demand for housing.

Table 6 provides the breakdown of employment gains by major industry segment. Because the cut to

corporate taxes drives private investment in machinery and equipment and construction, the impact on

manufacturing and construction employment is relatively stronger than that for the personal income tax

shock. Services employment is also up, making up roughly 65 per cent of the total.

The overall economic multiplier is calculated as the increase in real GDP associated with the original hit

to real corporate income tax revenues. The economic multiplier increases from 0.40 in 2013, the first

year of the shock, to 0.84 by 2022, strengthening over time because of the growing impact on the

productive capacity of the province. On average, over the 10-year simulation period, for every $100

million in real personal income tax reduction, real GDP is boosted by $66.8 million and 810 person-years

Table 5: Corporate Income Tax Shock—Ontario Key Economic Indicators


2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Value of 1% reduction in CIT on control (current $ millions) 532 595 660 668 666 698 741 777 804 850 6,991

Value of 1% reduction in CIT on control (millions of constant 2002 $) 436 479 522 519 510 526 549 567 577 600 5,285

Real GDP at market prices (millions of constant 2002 $) 176 226 275 308 338 374 412 446 474 504 3,532

GDP at market prices (current $ millions) 228 308 391 455 517 591 673 752 826 905 5,646

Consumer price index (percentage difference) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Personal income (current $ millions) 212 261 311 337 360 392 428 461 491 525 3,777

Personal disposable income (current $ millions) 173 212 251 271 288 314 343 370 393 421 3,036

Retail sales (current $ millions) 38 66 87 100 110 119 128 139 149 158 1,093

Housing starts 123 180 248 290 326 361 397 429 457 487 3,299

Corporate profits (current $ millions) 93 104 119 129 140 159 181 201 217 234 1,576

Population of labour force age 30 92 170 263 365 485 615 765 935 1,122 6,813

Labour force 1,303 1,734 2,144 2,390 2,600 2,827 3,062 3,263 3,427 3,591 26,339

Employment 2,071 2,776 3,458 3,874 4,227 4,604 4,991 5,323 5,596 5,869 42,788

Unemployment rate (level difference in rate) -0.01 -0.02 -0.02 -0.02 -0.02 -0.02 -0.03 -0.03 -0.03 -0.03

Total indirect taxes (current $ millions) 18 29 36 42 48 53 60 67 74 81 507

Provincial indirect taxes (current $ millions) 9 14 18 21 23 26 29 32 36 39 247

Federal personal income tax collections (current $ millions) 20 24 29 31 33 36 40 43 45 49 350

Provincial personal income tax collections (current $ millions) 12 15 17 19 20 22 24 26 28 30 213

Corporate income tax collections (current $ millions) -512 -573 -634 -639 -635 -663 -701 -733 -757 -799 -6,648

Provincial corporate income tax collections (current $ millions) -526 -588 -651 -658 -656 -686 -728 -762 -788 -833 -6,877

Total provincial revenue impact (current $ millions) 26 36 44 49 54 60 67 73 79 86 574


Cummulative

Total

Table 6: Corporate Income Tax Shock - Ontario Labour Market


2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Total employment 2,071 2,776 3,458 3,874 4,227 4,604 4,991 5,323 5,596 5,869 42,788

Primary sector 44 37 45 52 62 76 89 99 107 115 727

Manufacturing 404 533 680 778 869 968 1,065 1,149 1,218 1,286 8,951

Construction 233 336 447 490 518 538 567 596 619 644 4,988

Utilities 14 19 24 27 30 33 37 39 42 44 309

Services 1,376 1,850 2,261 2,527 2,748 2,987 3,232 3,439 3,608 3,779 27,807

Unemployment -769 -1,042 -1,314 -1,484 -1,627 -1,776 -1,929 -2,060 -2,169 -2,279 -16,449

Source: The Conference Board of Canada

Cumulative

Total

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of employment are created. In other words, for each $100 million in real personal income tax reduction

810 jobs will be created for one year.

Overall, this shock is larger and has a greater economic multiplier than the reduction in personal income

taxes. The simulation results lead to a boost in household income, consumption, and corporate profits,

helping to bolster government revenues and partially offset the initial cost of the tax cut. On a

cumulative basis, the initial cut to corporate income tax revenues is just shy of $7 billion over the 10-

year simulation horizon but the provincial government (and federal government) stands to recoup some

of those forgone revenues. Federal corporate income tax collections are up as a result of the shock, but

provincially they are down by a cumulative $6.9 billion, suggesting that the provincial government will

recoup a small portion of the initial $7-billion cut in corporate income tax. If we add to this the boost to

provincial indirect and personal income taxes, total revenues are up by a cumulative $574 million.

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Conclusion In this briefing we quantify the economic and fiscal impacts that a reduction to personal and corporate

income taxes can have on Ontario’s economy. In each case, we reduce provincial tax revenues

permanently, by 1 per cent, over a 10-year simulation horizon that extends from 2013 to 2022. The

simulations are done using the Conference Board’s model of Ontario’s economy, and the latest long-

term economic outlook as the backdrop.

In both simulations, the initial “hit” to the economy can be described as government giving income back

to the private sector—either households or businesses. The boost in private sector income has a positive

impact on economic activity because assumptions are made that the provincial government does not

offset the revenue losses through reduced spending or alternate revenue measures. While the economic

impacts associated with the different tax cuts are very different, in both instances we find that the

economic multiplier grows over time. That is, the impact on the economy relative to the size of the tax

cut grows over time, a result that is associated with increased private sector investment and the

accompanying boost to productive capacity in the economy. (See Chart 2.)

In the first simulation, personal income taxes are reduced—such that households are the first

beneficiaries from the tax cut—resulting in a boost to household spending and savings as the primary

first-round impact. While household savings rates are currently low, other leakages occur because of the

Chart 2: Progression of Multiplier Impacts Over Time

(change in real GDP as a share of initial reduction in taxes)


0.30

0.35

0.40

0.45

0.50

0.55

0.60

0.65

0.70

0.75

0.80

0.85

0.90

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Personal income tax

Corporate income tax

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import content associated with consumer spending and because taxes are recouped on the increase in

economic activity and income. Over time, the increased economic activity lifts corporate profits and

stimulates private capital investment—an important contributor to lifting productive capacity or

Ontario’s potential output.

In the second simulation, corporate income taxes are reduced. In this case, the impact on private capital

investment is more direct and larger, resulting in a bigger boost to potential output that is reflected in a

strengthening economic multiplier and stronger job creation.

Table 7 provides a clear comparison of the simulation results, with the two multipliers scaled back to an

initial tax cut of $100 million (in real terms) for each shock. In addition, we compare the simulation

results at two arbitrary points— that is, in the second year and tenth year after having implemented the

tax cuts—to demonstrate how the impacts evolve over time.

The findings are generally intuitive. In both cases, economic multipliers are below unity because of

leakages associated with savings, imports and the second round boosts to federal and provincial

government revenues. And the economic multipliers are lifted over time, largely due to increased

private sector capital investment, which lifts potential. This is especially significant in the case of a

corporate income tax cut that has a stronger impact on lifting private investment in machinery and

structures. While the personal income tax shock has a larger multiplier in the short term, the stronger

boost to potential associated with the corporate income tax shock eventually turns the tables. This is

also reflected in the employment effects.

Interestingly though, the real net cost of the tax measures on provincial revenues is greater for the

corporate income tax shock than for the personal income tax shock. This is due to the stronger

inflationary impact in the personal income tax shock. While price impacts are modest, higher prices do

help lift government revenues and erode the real value of the initial tax hit. Moreover, the personal

income tax shock has a stronger direct impact on consumer spending, helping to drive stronger gains in

indirect taxes.

Impact on real GDP (2002 $ millions) 55.5 47.2 68.9 84.0

Jobs supported 688.4 579.5 792.7 978.4

Real net cost on provincial revenues (2002 $ millions) -89.3 -94.0 -76.0 -89.9


Short term (year 2) Long term (year 10)

Table 5: Economic and Fiscal Impact of a Permanent $100-million Reduction in Taxes (inflation adjusted)

Personal

income tax

Corporate

income tax

Personal

income tax

Corporate

income tax

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