Working Paper: NBER ID: w16144
Authors: David Albouy
Abstract: 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.
Keywords: federal fiscal equalization; efficiency; equity; public policy
JEL Codes: H73; H77; J61; R13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| federal transfers designed to promote efficiency (H77) | ignore local cost differences (F12) |
| failure of equalization policy to eliminate fiscal imbalances (H69) | overpopulation in certain provinces (J11) |
| current Canadian equalization policy exacerbates pre-existing inefficiencies (H19) | locational inefficiencies (R32) |
| grants do not target areas equitably (H77) | disproportionately benefit provinces with higher-skilled workers and real incomes (J24) |
| failure of equalization policy to address fiscal imbalances (H69) | significant inefficiencies (D61) |