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The Canadian Federal-Provincial Fiscal Equalization System

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Disciplines
  • Economics
  • Law
  • Political Science

Abstract

The Canadian Federal-Provincial Fiscal Equalization System CESifo DICE Report 1/20083 Forum THE CANADIAN FEDERAL- PROVINCIAL FISCAL EQUALIZATION SYSTEM BEV DAHLBY* The federal-provincial fiscal equalization systemplays a very important role in Canadian public finances. This report describes this program, which has recently undergone major changes. We also pro- vide some background on intergovernmental finances in Canada to put the equalization system in its constitutional, historic and economic contexts. The report focuses on the main federal equalization grant program to the provincial governments and discusses only in passing the other major federal transfers to the provinces. It does not cover the fed- eral transfers to the territorial governments, which are determined under a different program, or the transfers that the ten provincial governments make to municipal governments.1 Background on federal-provincial finances in Canada The federal-provincial equalization program began in 1957 in response to the desire of the two largest provinces in Canada, Ontario and Quebec, to reassert their control over their revenues and recom- mence levying income taxes. (During World War II, the federal government had taken control of all of the major tax bases and distributed grants in lieu of taxes to the provinces.) Given the inequality in the fiscal capacities of the provinces, the move to greater provincial taxation would have resulted in large vari- ations in the revenue-raising abilities of the provinces. Hence, the federal government imple- mented the first equalization program to reduce the fiscal disparities of the provinces. The initial equal- ization program was based on three revenue sources – personal income tax, corporate income tax, and succession duties – and the standard of equalization was based on the average fiscal capacities of the two richest provinces at the time, Ontario and British Columbia. A history of the evolution of the equal- ization pro

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