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Raising Taxes through Equalization

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  • Michael Smart

Abstract

A simple theory suggests that a common form of federal horizontal equalization grants should cause subnational governments to levy higher tax rates, distorting local tax bases and so increasing federal transfers. To test this, I examine Canadian provincial tax policies in the 1972-2002 period. Consistent with the theory, provinces respond to expansions of equalization transfers by increasing their own tax rates. I estimate that on average tax rates in grant-receiving provinces were substantially and significantly higher as a consequence of the transfer formula.

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  • Michael Smart, 2007. "Raising Taxes through Equalization," CESifo Working Paper Series 1926, CESifo.
    • Handle: RePEc:ces:ceswps:_1926
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    References listed on IDEAS

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    8. Egger, Peter & Koethenbuerger, Marko & Smart, Michael, 2010. "Do fiscal transfers alleviate business tax competition? Evidence from Germany," Journal of Public Economics, Elsevier, vol. 94(3-4), pages 235-246, April.
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    More about this item

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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