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An Evaluation Of The Risk-sharing Function Of Equalization In Canada

Author

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  • Robin Boadway

  • Masayoshi Hayashi

    (Department of Economics, Meiji Gakuin University)

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.

Suggested Citation

  • Robin Boadway & Masayoshi Hayashi, 2002. "An Evaluation Of The Risk-sharing Function Of Equalization In Canada," Working Paper 1006, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:1006
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    File URL: https://www.econ.queensu.ca/sites/econ.queensu.ca/files/qed_wp_1006.pdf
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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. 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.
    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.
    4. A. D. Scott, 1952. "Federal Grants and Resource Allocation," Journal of Political Economy, University of Chicago Press, vol. 60(6), pages 534-534.
    5. James M. Buchanan, 1952. "Federal Grants and Resource Allocation," Journal of Political Economy, University of Chicago Press, vol. 60(3), pages 208-208.
    6. 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.
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    2. Albouy, David, 2012. "Evaluating the efficiency and equity of federal fiscal equalization," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 824-839.
    3. Robin Boadway & Masayoshi Hayashi, 2004. "An Evaluation of the Stabilization Properties of Equalization in Canada," Canadian Public Policy, University of Toronto Press, vol. 30(1), pages 91-109, March.

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    JEL classification:

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

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