Effective tax rates and the formation of manufacturing enterprises in Canada

It provides a consistent measure of the tax structure based on the economic theory of the firm and allows the comparison of the tax struc- ture across industries, provinces, and time. [...] Specifically, we estimate the elasticity of the number of enterprises with respect to the ETRMC to be in the neighbourhood of −0.33. [...] In the absence of taxes, the user cost is simply the cost of purchasing an additional unit of the input as determined by the market. [...] In the absence of taxes, the user cost of labour is given by the intersection of the labour supply curve (S) and the labour demand curve (D), generating a user cost of labour equal to the wage rate w0. [...] The ETRMC is a function of the METR on labour, tL, and the shape of the marginal cost function, which in turn reflects the characteristics of the firm’s produc- tion function.