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Raising taxes through equalization

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Abstract:

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

Document Type: Research Article

DOI: https://doi.org/10.1111/j.1365-2966.2007.00448.x

Affiliations: Department of Economics, University of Toronto

Publication date: 2007-11-01

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