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

Robin Boadway () and Masayoshi Hayashi ()
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Masayoshi Hayashi: Department of Economics, Meiji Gakuin University

No 1006, Working Papers from Queen's University, Department of Economics

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.

Keywords: Intergovernmental Transfers; Equalization; Risksharing; Interregional Redistribution (search for similar items in EconPapers)
JEL-codes: H77 (search for similar items in EconPapers)
Date: 2002-03
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