Canada is characterized by disparate regional and economic prospects. Half-a-century ago the concept of equalization was introduced to ensure that jurisdictions with sub-par revenue-raising capacity would still be able to offer residents “reasonably comparable” standards of public services. Equalization is sometimes described as a transfer of revenues from “Have” to “Have Not” provinces—or as a transfer from the federal government to recipient provinces. Neither is accurate. Equalization is funded by general tax revenues collected from all federal taxpayers in all provinces. The largest portion of equalization payments are actually collected from “have not” provinces.
The program introduces a deliberate distortion into the national fiscal equation— residents of recipient provinces receive a larger basket of public goods for their tax contributions than do those in other provinces. It also deliberately serves to induce individuals to remain in the least-favoured location.
Robbing Peter to Pay…Peter?, by AIMS Senior Fellow Don McIver, describes several of the distortions that are a result of equalization in Canada. Low-income federal taxpayers in “have” provinces indirectly contribute revenues that benefit high income earners in recipient provinces. Equalization also encourages higher levels of government spending in general. Indeed, many public servants will benefit from wages partially subsidized by lower-income taxpayers in non-recipient provinces.
McIver proposes some solutions to these distortions, like the reassignment of taxing powers or debt obligations, and providing for explicit tax relief for individuals in affected regions—which could target goals such as low income assistance, education allowances or mobility grants. The “enshrinement” of the principles of equalization might create constitutional questions, but McIver argues that the program can, and should, be redesigned.
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