The Marginal Cost of Public Funds and the Laffer Curve: Evidence from the Canadian Provinces

We estimate tax base elasticities for Canadian provinces to compute the Marginal Cost of Public Funds (MCF) for the three major taxes and assess the revenue implications of tax rate changes. We find that generally the corporate income tax has the highest and the sales tax has the lowest MCF. We also find that four provinces were on the negatively sloped sections of their total revenue Laffer curves with respect to their corporate income tax rate in 2013. The policy implication of this is that there would have been significant welfare gains from reductions in provincial corporate income tax rates.