New research quantifies the hidden price of hiking business taxes to close budget gaps
When cash-strapped provincial governments reach for the corporate income tax lever, the economic bill they hand to society is far steeper than their revenue projections suggest.
That is the central finding of new research published by the Fraser Institute, which puts a precise dollar figure on what it costs Canada's four largest provinces every time they try to raise an extra dollar from corporate income taxes.
The study, authored by Ergete Ferede, a professor of economics at MacEwan University, analyzed data from British Columbia, Alberta, Ontario, and Quebec, provinces that together account for roughly 87% of the country's population and 88% of its GDP, over a 42-year period stretching from 1981 to 2023.
The core concept underpinning the research is the marginal cost of public funds, or MCPF, which measures the total economic drag created by raising one additional dollar of government revenue through a given tax. An MCPF of 1.00 would mean a tax is perfectly efficient — a dollar raised costs society exactly a dollar. But corporate income taxes are nowhere close to that benchmark.
Ferede's calculations show that in 2025, the short-run MCPF for the provincial corporate income tax was 2.37 in British Columbia, 1.47 in Alberta, 1.66 in Ontario, and 1.55 in Quebec. That means every additional dollar of corporate tax revenue extracted by B.C.'s government costs the broader economy $2.37. Alberta, with the lowest rate of the four provinces, fares best — but even there, a dollar of new revenue carries a price tag of $1.47.
Business response
The reason the economic cost exceeds the revenue collected comes down to how businesses respond when governments turn up the tax dial.
The study estimates what researchers call semi-elasticities or how sharply the corporate tax base shrinks when the statutory rate rises by one percentage point.
The findings show a one-point rate increase trims the provincial tax base by 4.82% in British Columbia, 4.00% in Alberta, 3.47% in Ontario, and 3.10% in Quebec. Businesses are not passive in the face of higher rates; they respond through reduced investment, income shifting, and other behavioral adjustments that collectively erode the base governments were counting on.
Those behavioral responses also explain why the economic damage materializes quickly.
Earlier studies had documented the long-run consequences of corporate tax hikes, but the short-run picture had been less well mapped. Ferede fills that gap, noting that while the immediate hit to the tax base is somewhat smaller than the long-run erosion since businesses need time to fully reorganize around a new rate environment, it is still substantial and shows up in revenue projections almost immediately.
The disparity across provinces is largely a function of two factors: how high each province's tax rate is, and how sensitive its corporate sector is to rate changes.
British Columbia's combination of a historically elevated rate and a highly responsive tax base produces its outsized MCPF. Quebec, despite steady CIT rate increases since 2008 that have pushed its MCPF upward from 1.21 in 1985 to 1.55 today, still registers the lowest economic cost among the four because its corporate base is the least reactive in the short run. Alberta's 2020 decision to slash its rate from 12% to 8% translated directly into a falling MCPF, dropping from 1.79 to 1.47.
Inefficient tax raising
The findings carry a pointed policy message for provinces navigating persistent budget deficits. "A key policy message is that a higher CIT rate can be an inefficient way to raise revenue. Policy makers should weigh these economic costs against fiscal needs and long-term goals such as improving investment, productivity, and growth. Greater reliance on less distortionary taxes may reduce economic costs while supporting fiscal sustainability."
The research arrives as commentators across the political spectrum are pressing Ottawa and the provinces to rethink how Canada taxes business. Analysts have argued that the country's corporate tax structure is hampering the investment needed to lift sluggish productivity growth. The Fraser Institute paper adds to that body of evidence by quantifying exactly what the hidden cost of business taxation looks like in real dollar terms and province by province.
