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Evaluating the efficiency and equity of federal fiscal equalization

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  • Albouy, David

Abstract

Theoretically, federal transfers that make household location decisions efficient should ignore local cost differences, subsidize positive externalities, and offset differences in federal-tax payments and local taxes levied on non-residents, but not local tax revenues from residents. Transfers that redistribute resources equitably across regions will likely target areas with individuals of low earnings potential or low real incomes. Applying these criteria empirically, Canadian equalization policy appears neither efficient nor equitable, but exacerbates pre-existing inefficiencies and underfunds minorities. Locational inefficiencies cost Canada 0.41% of income annually and cause over-funded provinces to have populations of 30% beyond their efficient long-run levels.

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  • Albouy, David, 2012. "Evaluating the efficiency and equity of federal fiscal equalization," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 824-839.
    • Handle: RePEc:eee:pubeco:v:96:y:2012:i:9:p:824-839
    DOI: 10.1016/j.jpubeco.2012.05.015
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    More about this item

    Keywords

    Fiscal equalization; Federal taxation; Source-based and residence-based taxes; Horizontal equity; Cost-of-living; Compensating wage differentials;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • J61 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Geographic Labor Mobility; Immigrant Workers
    • R1 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics

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