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An Evaluation of the Stabilization Properties of Equalization in Canada

  • Robin Boadway

    ()

    (Department of Economics, Queen's University)

  • Masayoshi Hayashi

    ()

    (Department of Economics, Meiji Gakuin University)

The Canadian system of equalization is designed to address differences in revenue-raising capacity across provinces, basing a province's entitlements on its actual tax 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 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 variability in their potential revenue streams that exceeds what would exist in the absence of equalization.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1015.pdf
File Function: First version 2003
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Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1015.

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Length: 31 pages
Date of creation: Feb 2003
Date of revision:
Handle: RePEc:qed:wpaper:1015
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  1. 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.
  2. Hammond, George & von Hagen, Jürgen, 1995. "Regional Insurance Against Asymmetric Shocks. An Empirical Study for the European Community," CEPR Discussion Papers 1170, C.E.P.R. Discussion Papers.
  3. 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.
  4. 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.
  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. Michael Smart, 2004. "Equalization and Stabilization," Canadian Public Policy, University of Toronto Press, vol. 30(2), pages 195-208, June.
  7. Hepp, Ralf & von Hagen, Jürgen, 2001. "Regional Risksharing and Redistribution in the German Federation," CEPR Discussion Papers 2662, C.E.P.R. Discussion Papers.
  8. A. D. Scott, 1952. "Federal Grants and Resource Allocation," Journal of Political Economy, University of Chicago Press, vol. 60, pages 534.
  9. James M. Buchanan, 1952. "Federal Grants and Resource Allocation," Journal of Political Economy, University of Chicago Press, vol. 60, pages 208.
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