Raising Taxes through Equalization

Michael Smart

No 1926, CESifo Working Paper Series from CESifo

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.

Date: 2007
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Citations: View citations in EconPapers (69)

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Journal Article: Raising taxes through equalization (2007)
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