Bulletin n. 3/2007 | ||
December 2007 | ||
Smart Michael |
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Raising taxes through equalization | ||
in Canadian Journal of Economics/Revue Canadienne d'Economique , Volume 40, Number 4 , 2007 , 1188-1212 | ||
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. | ||