The Political Economy of Taxation: Some Evidence for Canada

Abstract

The article examines the determinants of variations in the effective average tax rate among Canadian manufacturing industry. It replicates a previous study (Salomon and Siegfried, 1977) on the U.S. corporate tax that found relationships between the economic structure and tax avoidance rates. Some methodological problems in the study are identified, which raise doubts about their conclusions. It is shown that effective tax rates fluctuate substantially over time and that the results may be sensitive to the year selected for analysis. As a consequence, tax-avoidance rates are regressed against a number of independent variables in two different years: 1974 and 1979. The overall weakness of the relationship is striking. With our best measure of the tax-avoidance rate, 2 out of 12 variables are significant in 1974 and one in 1979. These findings suggests that the corporate income tax may not be as important an instrument of industrial policy as it is sometimes claimed to be.

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