Raising Taxes through Equalization

28 Pages Posted: 7 Mar 2007

See all articles by Michael Smart

Michael Smart

University of Toronto - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

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Date Written: February 2007

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.

JEL Classification: H21

Suggested Citation

Smart, Michael, Raising Taxes through Equalization (February 2007). CESifo Working Paper Series No. 1926, Available at SSRN: https://ssrn.com/abstract=968596

Michael Smart (Contact Author)

University of Toronto - Department of Economics ( email )

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