Raising Taxes through Equalization
AbstractA 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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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1926.
Date of creation: 2007
Date of revision:
Other versions of this item:
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
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