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An Evaluation of the Risk-Sharing Function of Equalization in Canada

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  • Boadway, Robin
  • Hayashi, Masayoshi

Abstract

The Canadian system of equalization is designed to address differences in revenue-raising capacity across provinces, basing entitlements on actual provincial tax rates and bases. However, since it does so on a year-on-year basis, the standard against which a given province's equalization entitlements are calculated fluctuates from year to year as all provinces' tax bases and tax rates do. The consequence is that, while the redistribution function is fulfilled annually, the risk-sharing function suffers. The evidence we present indicates that at least for the business income tax, the equalization system can actually be destabilizing, thereby imposing on provinces variability in their potential revenue streams that exceeds what would exist in the absence of equalization.
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Suggested Citation

  • Boadway, Robin & Hayashi, Masayoshi, 2002. "An Evaluation of the Risk-Sharing Function of Equalization in Canada," Queen's Economics Department Working Papers 273432, Queen's University - Department of Economics.
    • Handle: RePEc:ags:quedwp:273432
    DOI: 10.22004/ag.econ.273432
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    References listed on IDEAS

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    1. 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 613-633, November.
    2. Forni, Mario & Reichlin, Lucrezia, 1999. "Risk and potential insurance in Europe," European Economic Review, Elsevier, vol. 43(7), pages 1237-1256, June.
    3. Bayoumi, Tamim & Masson, Paul R., 1995. "Fiscal flows in the United States and Canada: Lessons for monetary union in Europe," European Economic Review, Elsevier, vol. 39(2), pages 253-274, February.
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    JEL classification:

    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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