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An Evaluation of the Stabilization Properties of Equalization in Canada

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  • Robin Boadway
  • Masayoshi Hayashi

Abstract

The Canadian system of equalization is designed to address differences in revenue-raising capacity across provinces, basing a province's annual entitlements on its actual tax bases. However, the standard against which a given province's equalization entitlements are calculated fluctuates from year to year with all provinces' tax bases and tax rates. The consequence is that, while the redistribution function is fulfilled annually, the stability of provincial revenues suffers. The evidence we present indicates that, at least for the three revenue categories we examine, the equalization system can actually be destabilizing, thereby imposing on provinces volatility in their potential revenue streams that exceeds what would exist in the absence of equalization.

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Bibliographic Info

Article provided by University of Toronto Press in its journal Canadian Public Policy.

Volume (Year): 30 (2004)
Issue (Month): 1 (March)
Pages: 91-109

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Handle: RePEc:cpp:issued:v:30:y:2004:i:1:p:91-109

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References

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  1. Hepp, Ralf & von Hagen, Jürgen, 2001. "Regional Risksharing and Redistribution in the German Federation," CEPR Discussion Papers 2662, C.E.P.R. Discussion Papers.
  2. Bayoumi, Tamim & Masson, Paul R, 1994. "Fiscal Flows in the United States and Canada: Lessons for Monetary Union in Europe," CEPR Discussion Papers 1057, C.E.P.R. Discussion Papers.
  3. Decressin, Jorg, 2002. "Regional income redistribution and risk sharing: how does Italy compare in Europe?," Journal of Public Economics, Elsevier, vol. 86(2), pages 287-306, November.
  4. A. D. Scott, 1952. "Federal Grants and Resource Allocation," Journal of Political Economy, University of Chicago Press, vol. 60, pages 534.
  5. von Hagen, Jurgen & Hammond, George W, 1998. "Regional Insurance against Asymmetric Shocks: An Empirical Study for the European Community," The Manchester School of Economic & Social Studies, University of Manchester, vol. 66(3), pages 331-53, June.
  6. Michael Smart, 2004. "Equalization and Stabilization," Canadian Public Policy, University of Toronto Press, vol. 30(2), pages 195-208, June.
  7. Robin W. Boadway & Frank R. Flatters, 1982. "Efficiency and Equalization Payments in a Federal System of Government: A Synthesis and Extension of Recent Results," Canadian Journal of Economics, Canadian Economics Association, vol. 15(4), pages 613-33, November.
  8. James M. Buchanan, 1952. "Federal Grants and Resource Allocation," Journal of Political Economy, University of Chicago Press, vol. 60, pages 208.
  9. Melitz, Jacques & Zumer, Frederic, 2002. "Regional redistribution and stabilization by the center in Canada, France, the UK and the US:: A reassessment and new tests," Journal of Public Economics, Elsevier, vol. 86(2), pages 263-286, November.
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Citations

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Cited by:
  1. Buettner, Thiess, 2009. "The contribution of equalization transfers to fiscal adjustment: Empirical results for German municipalities and a US-German comparison," Journal of Comparative Economics, Elsevier, vol. 37(3), pages 417-431, September.
  2. Masayoshi Hayashi, 2013. "On the Decomposition of Regional Stabilization and Redistribution," CIRJE F-Series CIRJE-F-910, CIRJE, Faculty of Economics, University of Tokyo.
  3. Dafflon, Bernard, 2010. "Local Fiscal Equalization: a New Proposal and an Experiment," FSES Working Papers 418, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.
  4. Linda Andersson, 2008. "Fiscal Flows and Financial Markets: To What Extent Do They Provide Risk Sharing within Sweden?," Regional Studies, Taylor & Francis Journals, vol. 42(7), pages 1003-1011.
  5. Masayoshi Hayashi, 2012. "Channels of Stabilization in a System of Local Public Health Insurance: The Case of the National Health Insurance in Japan," CIRJE F-Series CIRJE-F-847, CIRJE, Faculty of Economics, University of Tokyo.
  6. Hotz, Joffre & Unterschultz, James R., 2009. "Hedging Alberta Government's Oil and Gas Revenue: Is Acting Like a Farmer a Viable Strategy?," Staff Paper Series 91401, University of Alberta, Department of Resource Economics and Environmental Sociology.
  7. Michael Smart, 2004. "Equalization and Stabilization," Canadian Public Policy, University of Toronto Press, vol. 30(2), pages 195-208, June.
  8. David Albouy, 2010. "Evaluating the Efficiency and Equity of Federal Fiscal Equalization," NBER Working Papers 16144, National Bureau of Economic Research, Inc.
  9. Andersson, Linda, 2004. "Output Smoothing between Regions in Sweden," UmeÃ¥ Economic Studies 643, Umeå University, Department of Economics.
  10. Robin Boadway, 2003. "The Theory and Practice of Equalization," Working Papers 1016, Queen's University, Department of Economics.
  11. Hansjörg Blöchliger & Claire Charbit, 2008. "Fiscal equalisation," OECD Journal: Economic Studies, OECD Publishing, vol. 2008(1), pages 1-22.
  12. Nathaniel M. Lewis, 2010. "A Decade Later: Assessing Successes and Challenges in Manitoba's Provincial Immigrant Nominee Program," Canadian Public Policy, University of Toronto Press, vol. 36(2), pages 241-264, June.
  13. Philippe Cyrenne & Manish Pandey, 2013. "Fiscal Equalization, Government Expenditures and Endogenous Growth," Departmental Working Papers 2013-03, The University of Winnipeg, Department of Economics.

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