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The Author of This Working Paper Kenneth J. McKenzie is Professor of Economics and Director of the Institute for Advanced Policy at the University of Calgary and the EnCana Scholar at the C. D. Howe Institute. [...] Central to this definition is the share of tax room for various revenue sources occupied by the federal and provincial governments, and the size and structure of federal transfers to the provinces, in particular the big three transfer programs: Equalization, the Canada Health Transfer (CHT), and the Canada Social Transfer (CST). [...] While one wonders about the extent of the angst over fiscal federalism on the part of "ordinary" Canadians, particularly given the current political climate in the country and in light of the fact that it is extremely unlikely that any ordinary Canadian actually understands the complex and perhaps unfathomable nature of fiscal federalism in Canada, there is little doubt that the fiscal balance of [...] At the risk of drastically oversimplifying volumes of complex research in this area, I think that it is fair to say that most of the benefits of federalism are associated with the decentralization of spending while most of the costs are associated with the decentralization of revenues. [...] The first is a normative insight that tips the balance, in my mind, in favour of some amount of fiscal rebalancing via the transfer of tax points to the provinces rather than an expansion of transfers.

This paper investigates the effect of the corporate income tax (CIT) on wages using panel data for Canadian provinces. We find that the CIT has a statistically significant negative effect on wages through its adverse impact on the capital/labour ratio. The empirical results suggest that workers bear a significant part of the corporate tax in the form of lower wages. Under the standard assumption that the CIT base is unresponsive to changes in the tax rate, our estimates suggest that the reduction in aggregate wages associated with a $1 increase in provincial corporate tax revenue due to an increase in the statutory CIT rate ranges from 95 Canadian cents for Newfoundland and Labrador to C$1.74 for New Brunswick. Under the more reasonable assumption that the CIT base shrinks in response to an increase in the tax rate, the estimates range from C$1.52 for Alberta to C$3.85 for Prince Edward Island. The results are robust to various sensitivity checks.

The Alberta government's 2009 New Royalty Framework elicited resistance on the part of the energy industry, leading to subsequent reductions in the royalties imposed on natural gas and conventional oil. However, the oil sands sector, subject to different terms, quickly accepted the new arrangement with little complaint, recognizing it as win-win situation for industry and the government. Under the framework, Alberta recoups much more money in royalties -- about $1 billion over the two year period of 2009 and 2010 -- without impinging significantly on investment in the oil sands. This brief paper demonstrates that by spreading the financial risks and benefits to everyone involved, the new framework proves it's possible to generate increased revenue without frightening off future investment. The same model could conceivably be applied to the conventional oil and natural gas sectors.