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An Evaluation of the Stabilization Properties of Equalization in Canada

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  • Robin Boadway
  • Masayoshi Hayashi

Abstract

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.

Suggested Citation

  • 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.
    • Handle: RePEc:cpp:issued:v:30:y:2004:i:1:p:91-109
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    Cited by:

    1. Masayoshi Hayashi, 2012. "Channels of Stabilization in a System of Local Public Health Insurance: The Case of the National Health Insurance in Japan," CARF F-Series CARF-F-280, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    2. Ana B. Ania & Andreas Wagener, 2021. "Laboratory federalism with public funds sharing," Economic Inquiry, Western Economic Association International, vol. 59(3), pages 1047-1065, July.
    3. Nathaniel M. Lewis, 2010. "A Decade Later: Assessing Successes and Challenges in Manitoba's Provincial Immigrant Nominee Program," Canadian Public Policy, University of Toronto Press, vol. 36(2), pages 241-264, June.
    4. Dafflon, Bernard, 2010. "Local Fiscal Equalization: a New Proposal and an Experiment," FSES Working Papers 418, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.
    5. Albouy, David, 2012. "Evaluating the efficiency and equity of federal fiscal equalization," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 824-839.
    6. Adolfo Meisel-Roca & María Aguilera-Díaz, 2020. "Cartagena, 2005-2018: Lo bueno, lo regular y lo malo," Documentos de trabajo sobre Economía Regional y Urbana 294, Banco de la Republica de Colombia.
    7. Manuel E. Lago & Santiago Lago-Peñas & Jorge Martinez-Vazquez, 2022. "On the effects of intergovernmental grants: a survey," Working Papers. Collection A: Public economics, governance and decentralization 2204, Universidade de Vigo, GEN - Governance and Economics research Network.
    8. Jaime Bonet-Morón & Jhorland Ayala-García, 2015. "Transferencias intergubernamentales y disparidades fiscales horizontales en Colombia," Documentos de Trabajo Sobre Economía Regional y Urbana 14181, Banco de la República, Economía Regional.
    9. Manuel E. Lago & Santiago Lago-Peñas & Jorge Martinez-Vazquez, 2024. "On the effects of intergovernmental grants: a survey," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(3), pages 856-908, June.
    10. Masayoshi Hayashi, 2013. "On the Decomposition of Regional Stabilization and Redistribution," CIRJE F-Series CIRJE-F-910, CIRJE, Faculty of Economics, University of Tokyo.
    11. Hansjörg Blöchliger & Claire Charbit, 2008. "Fiscal equalisation," OECD Journal: Economic Studies, OECD Publishing, vol. 2008(1), pages 1-22.
    12. Robin Boadway & Katherine Cuff, 2017. "The impressive contribution of Canadian economists to fiscal federalism theory and policy," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(5), pages 1348-1380, December.
    13. Buettner, Thiess, 2009. "The contribution of equalization transfers to fiscal adjustment: Empirical results for German municipalities and a US-German comparison," Journal of Comparative Economics, Elsevier, vol. 37(3), pages 417-431, September.
    14. Robin Boadway, 2004. "The Theory and Practice of Equalization," CESifo Economic Studies, CESifo Group, vol. 50(1), pages 211-254.
    15. 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.
    16. Philippe Cyrenne & Manish Pandey, 2015. "Fiscal equalization, government expenditures and endogenous growth," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(2), pages 311-329, April.
    17. Andersson, Linda, 2004. "Output Smoothing between Regions in Sweden," Umeå Economic Studies 643, Umeå University, Department of Economics.
    18. Diana Ricciulli-Marín & Jaime Bonet-Morón & Gerson Javier Pérez-Valbuena, 2021. "Política fiscal subnacional y ciclos económicos en Colombia," Documentos de Trabajo Sobre Economía Regional y Urbana 18604, Banco de la República, Economía Regional.
    19. Michael Smart, 2004. "Equalization and Stabilization," Canadian Public Policy, University of Toronto Press, vol. 30(2), pages 195-208, June.
    20. Hotz, Joffre & Unterschultz, James R., 2009. "Hedging Alberta Government's Oil and Gas Revenue: Is Acting Like a Farmer a Viable Strategy?," Staff Paper Series 91401, University of Alberta, Department of Resource Economics and Environmental Sociology.
    21. Linda Andersson, 2008. "Fiscal Flows and Financial Markets: To What Extent Do They Provide Risk Sharing within Sweden?," Regional Studies, Taylor & Francis Journals, vol. 42(7), pages 1003-1011.

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    JEL classification:

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

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