Federal Income Tax Cuts and Regional Disparities
This paper examines the potential impact of federal personal income tax reform on regional disparities. We present simulations of the provincial distribution of federal PIT revenue changes under six different tax reduction schemes applied to the projected income distribution for the year 2000. We show that the provincial distribution of federal income tax reductions can vary considerably depending on the chosen option. Options that flatten the rate structure would tend to aggravate regional disparities because they provide relatively greater benefits to richer provinces. In particular, moving to a single rate tax or to a three-rate PIT with wider tax brackets would produce a relatively larger tax reduction in the richer provinces. It would also provide relatively higher supply-side effects through the tax break on capital gains and the larger reduction in the top marginal rate. The analysis also indicates that we can prevent potential increases in regional disparities by introducing tax cuts that do not affect horizontal redistribution such as equi-proportional reduction in all PIT rates.