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The Impact of Tax

Measures on Ontarios
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 Boards 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 Boards
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 Boards proprietary model of Ontarios 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 Boards 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 Ontarios potential output and
future production.
Methodology and Key Assumptions
The simulations were performed using the Conference Boards Ontario economic model, using the
Boards 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 Boards provincial
forecasting model captures the sum of the direct, indirect, and induced impacts on Ontarios 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
Boards Ontario forecasting model contains only a partial accounting of government revenues (including
direct and indirect tax revenues). In addition, government accounts in the Conference Boards 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, Ontarios 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 Ontarios 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 2022a 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 spreadlifting imports (or leakages) and, eventually, business
investment as firms react to the permanent increase in demand. The boost to business investment helps
to lift Ontarios 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 Ontarios
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 Ontarios 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 effectsmore 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 Ontarios key economic indicators. The lift to consumer
spending will have widespread and growing impacts on Ontarios economy. Over the simulation horizon,
the contribution to real GDPincluding direct, indirect, and induced impactsgrows 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 2,800on a cumulative basis, roughly 21,700 person-years of employment is
created.

Table 1: Personal Income Tax ShockOntario Real GDP Expenditure Based
Level 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
Source: The Conference Board of Canada.
Cummulative
total
Table 2: Personal Income Tax ShockOntario 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
Source: The Conference Board of Canada.
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
lions 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 Ontarios 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
Level difference shock minus control except where otherwise indicated
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 2022a 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 Ontarios 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 Ontarios 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 GDPincluding direct, indirect, and induced impactsgrows from $176 million in 2013 to $504
million in 2022.

Table 5 summarizes the impact on Ontarios 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 shockon 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 ShockOntario Real GDP Expenditure Based
Level 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
Source: The Conference Board of Canada.
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 ShockOntario 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 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
Source: The Conference Board of Canada.
Cummulative
Total
Table 6: Corporate Income Tax Shock - Ontario Labour Market
Level difference shock minus control except where otherwise indicated
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 Ontarios 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 Boards model of Ontarios 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 sectoreither 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 reducedsuch that households are the first
beneficiaries from the tax cutresulting 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)

Source: The Conference Board of Canada.
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 investmentan important contributor to lifting productive capacity or
Ontarios 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 cutsto 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
Source: The Conference Board of Canada.
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