IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_1926.html
   My bibliography  Save this paper

Raising Taxes through Equalization

Author

Listed:
  • Michael Smart

Abstract

A simple theory suggests that a common form of federal horizontal equalization grants should cause subnational governments to levy higher tax rates, distorting local tax bases and so increasing federal transfers. To test this, I examine Canadian provincial tax policies in the 1972-2002 period. Consistent with the theory, provinces respond to expansions of equalization transfers by increasing their own tax rates. I estimate that on average tax rates in grant-receiving provinces were substantially and significantly higher as a consequence of the transfer formula.

Suggested Citation

  • Michael Smart, 2007. "Raising Taxes through Equalization," CESifo Working Paper Series 1926, CESifo.
    • Handle: RePEc:ces:ceswps:_1926
    as

    Download full text from publisher

    File URL: https://www.cesifo.org/DocDL/cesifo1_wp1926.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Masayoshi Hayashi & Robin Boadway, 2001. "An empirical analysis of intergovernmental tax interaction: the case of business income taxes in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 34(2), pages 481-503, May.
    2. Card, David & Payne, A. Abigail, 2002. "School finance reform, the distribution of school spending, and the distribution of student test scores," Journal of Public Economics, Elsevier, vol. 83(1), pages 49-82, January.
    3. Buettner, Thiess, 2006. "The incentive effect of fiscal equalization transfers on tax policy," Journal of Public Economics, Elsevier, vol. 90(3), pages 477-497, February.
    4. Sam Bucovetsky & Michael Smart, 2006. "The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(1), pages 119-144, January.
    5. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, vol. 84(3), pages 622-641, June.
    6. 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.
    7. Christian Baretti & Bernd Huber & Karl Lichtblau, 2002. "A Tax on Tax Revenue: The Incentive Effects of Equalizing Transfers: Evidence from Germany," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 9(6), pages 631-649, November.
    8. Egger, Peter & Koethenbuerger, Marko & Smart, Michael, 2010. "Do fiscal transfers alleviate business tax competition? Evidence from Germany," Journal of Public Economics, Elsevier, vol. 94(3-4), pages 235-246, April.
    9. Bev Dahlby & Neil Warren, 2003. "Fiscal Incentive Effects of the Australian Equalisation System," The Economic Record, The Economic Society of Australia, vol. 79(247), pages 434-445, December.
    10. Baretti, Christian & Huber, Bernd & Lichtblau, Karl, 2002. "A Tax on Tax Revenue: The Incentive Effects of Equalizing Transfers: Evidence from Germany," Munich Reprints in Economics 20129, University of Munich, Department of Economics.
    11. Bird, Richard M. & Smart, Michael, 2002. "Intergovernmental Fiscal Transfers: International Lessons for Developing Countries," World Development, Elsevier, vol. 30(6), pages 899-912, June.
    12. Brian Knight, 2002. "Endogenous Federal Grants and Crowd-out of State Government Spending: Theory and Evidence from the Federal Highway Aid Program," American Economic Review, American Economic Association, vol. 92(1), pages 71-92, March.
    13. Michael Smart, 1998. "Taxation and Deadweight Loss in a System of Intergovernmental Transfers," Canadian Journal of Economics, Canadian Economics Association, vol. 31(1), pages 189-206, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. Michael Smart, 2007. "Raising taxes through equalization," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 40(4), pages 1188-1212, November.
    3. Peter Egger & Marko Koethenbuerger & Michael Smart, 2010. "Electoral rules and incentive effects of fiscal transfers: evidence from Germany," Working Papers 2010/44, Institut d'Economia de Barcelona (IEB).
    4. Monika Banaszewska, 2023. "Equalisation Grants and Local Taxation: The Case of Poland," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 2, pages 47-65.
    5. Caterina Liesegang & Marco Runkel, 2009. "Corporate Income Taxation of Multinationals and Fiscal Equalization," CESifo Working Paper Series 2747, CESifo.
    6. Johannes Becker & Michael Kriebel, 2017. "Fiscal equalisation schemes under competition," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(5), pages 800-816, September.
    7. Hindriks, Jean & Peralta, Susana & Weber, Shlomo, 2008. "Competing in taxes and investment under fiscal equalization," Journal of Public Economics, Elsevier, vol. 92(12), pages 2392-2402, December.
    8. Caterina Liesegang & Marco Runkel, 2018. "Tax competition and fiscal equalization under corporate income taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(2), pages 311-324, April.
    9. Egger, Peter & Koethenbuerger, Marko & Smart, Michael, 2010. "Do fiscal transfers alleviate business tax competition? Evidence from Germany," Journal of Public Economics, Elsevier, vol. 94(3-4), pages 235-246, April.
    10. Yongzheng Liu, 2014. "Does competition for capital discipline governments? The role of fiscal equalization," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(3), pages 345-374, June.
    11. Köthenbürger, Marko & Egger, Peter & Smart, Michael, 2013. "Do Electoral Rules Make Legislators Differently Responsive to Fiscal Transfers? Evidence from German Municipalities," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79972, Verein für Socialpolitik / German Economic Association.
    12. Miyazaki, Takeshi, 2020. "Intergovernmental fiscal transfers and tax efforts: Regression-discontinuity analysis for Japanese local governments," Regional Science and Urban Economics, Elsevier, vol. 84(C).
    13. HINDRIKS, Jean & PERALTA, Susana & WEBER, Shlomo, 2005. "Fiscal competition, revenue sharing, and policy-induced agglomeration," LIDAM Discussion Papers CORE 2005093, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    14. 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.
    15. Peter Egger & Marko Koethenbuerger & Michael Smart, 2010. "Electoral rules and incentive effects of fiscal transfers: evidence from Germany," Working Papers 2010/44, Institut d'Economia de Barcelona (IEB).
    16. Krause, Manuela & Büttner, Thiess, 2017. "Does Fiscal Equalization Lead to Higher Tax Rates? Empirical Evidence from Germany," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168214, Verein für Socialpolitik / German Economic Association.
    17. Miyazaki, Takeshi, 2016. "Intergovernmental Fiscal Transfers and Tax Efforts: Evidence from Japan," MPRA Paper 74337, University Library of Munich, Germany.
    18. Christian Kelders & Marko Koethenbuerger, 2010. "Tax incentives in fiscal federalism: an integrated perspective," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 43(2), pages 683-703, May.
    19. Jean Hindriks & Susana Peralta & Shlomo Weber, 2014. "Local Taxation of Global Corporation: A Simple Solution," Annals of Economics and Statistics, GENES, issue 113-114, pages 37-65.
    20. Christos Kotsogiannis & Robert Schwager, 2006. "Fiscal Equalization and Yardstick Competition," Working Papers 2006-15, University of Kentucky, Institute for Federalism and Intergovernmental Relations.

    More about this item

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_1926. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Klaus Wohlrabe (email available below). General contact details of provider: https://edirc.repec.org/data/cesifde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.