Evaluating the Efficiency and Equity of Federal Fiscal Equalization
In theory, federal transfers that make household location decisions efficient should ignore local cost differences, subsidize positive externalities, and offset differences in federal-tax payments and local taxes levied on non-residents, but not local tax revenues from residents. Transfers that redistribute resources equitably across regions will likely target areas with individuals of low earnings potential or low real incomes. Applying these criteria empirically, Canadian equalization policy appears neither efficient nor equitable, but exacerbates pre-existing inefficiencies and underfunds minorities. Locational inefficiencies cost Canada 0.41 percent of income annually and cause over-funded provinces to have populations 31 percent beyond their efficient long-run levels.
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I thank Robin Boadway, John Burbidge, Rob Gillezeau, Jim Hines, Keren Horn, Marcelin Joanis, Fernando Leibovici, Peter Mieszkowski, Kevin Milligan, Gordon Myers, Christine Neill, Jim Poterba, Joel Slemrod, Michael Smart,Wallace Oates, Dan Usher, Francois Vaillancourt,WilliamWatson, DaveWildasin, and participants of seminars at George Mason, Georgia State, McGill, Michigan, NYU, Queen's, Simon Fraser, UBC, UQAM, Victoria, the Barcelona Institute of Economics Urban Economics Meetings, the Urban Economics Association Meetings and the National Tax Association Annual Meetings, and Tax Time (Cambridge, ON), for their help, input, and advice. Any mistakes are my own. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Albouy, David, 2012. "Evaluating the efficiency and equity of federal fiscal equalization," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 824-839. citation courtesy of