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An Evaluation of the Stabilization Properties of Equalization in Canada

  • Robin Boadway
  • Masayoshi Hayashi

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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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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  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. 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.
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  5. 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.
  6. A. D. Scott, 1952. "Federal Grants and Resource Allocation," Journal of Political Economy, University of Chicago Press, vol. 60, pages 534.
  7. 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.
  8. 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.
  9. Michael Smart, 2004. "Equalization and Stabilization," Canadian Public Policy, University of Toronto Press, vol. 30(2), pages 195-208, June.
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