National Tax Journal, September 2012, 65 (3), 563–594 THE IMPACT OF TAX CUTS ON ECONOMIC GROWTH: EVIDENCE FROM THE CANADIAN PROVINCES Ergete Ferede and Bev Dahlby We examine the impact of the Canadian provincial governments’ tax rates on economic growth using panel data covering the period 1977–2006. We find that a higher provincial statutory corporate income tax rate is associated with lower private investment and slower economic growth. Our empirical estimates sug- gest that a 1 percentage point cut in the corporate tax rate is related to a 0.1–0.2 percentage point increase in the annual growth rate. Our results also indicate that switching from a retail sales tax to a sales tax that is harmonized with the federal value-added sales tax boosts provincial investment and growth. Keywords: tax structure, economic growth, private investment JEL Codes: H20, H70, O51 I. INTRODUCTION T he impact of taxation on growth and investment has been hotly debated both in academic and political circles. Proponents of tax cuts point to the effects that lower taxes have on incentives to work, to save, and to invest, and argue that reducing tax rates boosts economic growth. The tax cuts introduced by the provincial government of British Columbia (BC) in 2001 are an example of this type of pro-growth tax policy. The tax reform was introduced in two stages. In an attempt to make its economy more competitive, the BC government reduced its corporate income tax (CIT) rate initially by 3 percentage points, with an additional 1.5 percentage point reduction to 12 percent in 2005. The government also cut personal income tax (PIT) rates by about 25 percent across all income tax brackets. The goal of these tax rate reductions was to boost invest- ment and economic growth in the province. Ergete Ferede: Department of Economics, Grant MacEwan University, Edmonton, Canada (FeredeE@ macewan.ca) Bev Dahlby: Department of Economics, University of Alberta, Edmonton, Canada (bdahlby@ualberta.ca)