Kenneth J. McKenzie

Electoral and Partisan Cycles in Fiscal Policy: An Examination of Canadian Provinces

This paper examines the fiscal policy choices of Canadian provincial governments in the context of partisan and opportunistic cycles. We identify an electoral cycle in which the predilection of provincial governments of all political stripes to increase taxes is temporarily halted in election years. Opportunistic responses in spending are also present. Spending in highly visible areas (schools, roads and hockey rinks) tends to increase in election years. Partisan responses are largely absent from revenues but appear more frequently in program spending choices. Thus, Canadian political parties tend to favour differentiating amongst themselves via their spending, as opposed to their revenue, choices.

Measuring Effective Tax Rates in the Presence of Multiple Inputs: A Production Based Approach

We suggest a new method for comparing tax regimes acrossjurisdictions. The approach aggregates taxes on inputs by focussingon production, rather than investment, decisions. Taxes on variousinputs affect production decisions by increasing marginal costs.By calculating the difference between the tax-inclusive and tax-exclusivemarginal cost of production, we determine the effective excisetax rate on marginal costs implied by all of the various taxesimposed upon the firm‘s inputs. The effective tax rate on marginalcosts provides a convenient summary measure of the potentialimpact of taxes on all inputs on production location decisions.

Marginal Effective Tax Rates for Capital in the Canadian Mining Industry

The authors model a firm that explores, develops, and extracts a depletable asset, taking into account various features of Canadian corporate and Ontario and Quebec mining tax law. They derive the user cost of capital and effective tax rate for investments undertaken by a mining firm. Calculations based on 1985 tax law show that there is considerable dispersion in effective tax rates, most being negative, especially for processing assets. The authors conclude that these taxes have been very poor collectors of mining rents compared to a neutral cash flow tax. Coauthors are Neil Bruce, Ken McKenzie, and Jack Mintz.

The Implications of Risk and Irreversibility for the Measurement of Marginal Effective Tax Rates on Capital

The implications of risk and irreversibility for the measurement of marginal effective tax rates on capital are examined. It is shown that, when capital is irreversible, the marginal effective tax rate is an increasing function of systematic and unsystematic capital and income risk. The tax system may, thus, distort investments in risky capital to a much greater extent than is implied by previous research that ignored irreversibilities. Marginal effective tax rate calculations based upon the Canadian corporate tax system are provided.

Dividend Taxation and Equity Value: The Canadian Tax Changes of 1986

The 1986 Canadian federal budget, which increased the tax rate on dividends vis-a-vis capital gains, provides a natural experiment for examining the relationship between taxation and asset values. The authors employ a stock market event study to investigate the differential impact of this tax change on high- and low-dividend securities. To control for other new information contained in the budget, they focus on companies that issue both preferred (high-dividend) stocks and common (low-dividend) stocks. The authors find that abnormal returns are negatively related to dividend yields, which provides support for the hypothesis that taxes affect stock prices.

Tax Subsidies for R&D in Canadian Provinces

In Canada there is too much focus on who is accountable to whom? or who controls what? and not enough on who is accountable for what? The federal government must lead consensus building toward an action plan regarding what works best in the delivery of mental health and addictions services - and the provinces must take seriously the implementation of a national plan that cultivates a culture of partnership and continuous improvement. Some redefinition of roles may have to be negotiated, but regional health authorities have to coordinate with national and provincial frameworks.

The Impact of the Capital Gains Exemption on Capital Markets

Using event study methodology, we test the hypothesis that the 1985 capital gains exemption decreased the marginal effective tax rate on capital gains using two samples of stock market prices that control for industry and firm level effects of other aspects of the budget. We derive estimates of the impact of the exemption on the effective capital gains tax rate, and on the user cost of capital. Using existing estimates of the relationship between the user cost of capital and investment, we find that, depending upon the sample, the exemption may have increased real investment by as much as six per cent, or had no impact at all.

A Case of Institutional Endogeneity? A study of the Budgetary Reforms of the Government of Alberta, Canada

We undertake a case study of the budgetary reforms implemented in 1993 in the province of Alberta, Canada. Canadian provinces operate under political and institutional regimes which differ from those of US states but which closely resemble those member states of the proposed EMU. We examine the response of the government of Alberta to exogenous shocks to its revenues and expenditures during the 1966/67 to 1992/93.

THE BIG AND THE SMALL OF TAX SUPPORT FOR R&D IN CANADA

Innovation is critical in the knowledge-based economy. It is generally accepted that governments have an important role to play in promoting innovative activity and R&D. Both the federal and provincial governments in Canada provide tax subsidies, and other forms of support, for R&D. Changes to various programs offered by the federal government were introduced in Budget 2012, most particularly related to the Scientific Research and Experimental Development (SR&ED) tax credit program. This paper analyzes the state of tax subsidies for R&D both pre- and post-budget, and at both the federal and provincial level. It is shown that there is a patchwork of effective tax subsidy rates in Canada, which vary both between and within provinces, between small versus large firms, and across sectors and types of R&D activity. The result is a misallocation of R&D resources and a system of government support that is less effective than it could be. On some dimensions Budget 2012 was a move in the right direction, but on other dimensions matters were made worse, resulting in a reconfiguration of tax support across R&D activities that is more distortionary and less efficient. Most particularly, the post-budget tax system heavily favours small firms over large firms, and labour intensive R&D over capital intensive R&D. This paper offers a lucid examination of R&D tax support pre- and post-budget, and argues persuasively that Canadian governments should adopt a more uniform, less distortionary approach to tax subsidies for R&D if they are truly interested in setting innovation free.

Taxation and R&D: An Investigation of the Push and Pull Effects

Dans cet article, nous mesurons l’impact que les subventions directes à caractère fiscal (effet « push ») et la compétitivité du système de taxe sur la production (effet « pull ») ont sur la recherche et le développement. Nous utilisons un ensemble de données recueillies au moyen d’un panel sur neuf pays pendant plus de 19 ans pour évaluer un modèle dynamique à effets fixes des activités de R-D. Les deux effets sont significatifs et importants économiquement. L’élasticité de court terme de la R-D par rapport à l’effet « push » varie de -0,12 à -0,22, alors que l’élasticité de long terme varie de -0,46 à -0,83 ; l’élasticité de court terme de la R-D par rapport à l’effet « pull » varie de -0,15 à -0,28, alors que l’élasticité de long terme varie de -0,58 to -0,83.