CANADA'S EQUALIZATION PROGRAM DOESN'T PASS TRIPLE-E TEST

Release Date: February 12, 1996

Vancouver, B.C. > > > Equalization payments should be made to the Maritime provinces only, Canada's poorest region, according to the latest Fraser Institute study.

In The Uneasy Case for Equalization Payments, Dan Usher, Professor of Economics at Queen's University, examines the motivations, methods, and effects of Canada's current equalization system. He concludes that this $8 billion/year program is neither equalizing, efficient nor equitable. He recommends the program be scrapped or dramatically altered.

NOT EQUALIZING
Revenue to finance equalization payments is acquired by federal taxation of all Canadians, rich and poor alike. The net contributors to the program, however, are the taxpayers in the non-recipient provinces of Ontario, Alberta, and British Columbia.

Dr. Usher argues that the Canadian equalization program is almost certainly less beneficial to the poor than if $8 billion now spent on equalization were passed on to them directly. "Payments from the federal government to poor provinces may convey no net advantage to poor people as a whole."

Worse, he says, is that the program is likely to be a transfer from the poor in rich provinces to the rich in poor provinces.

NOT EFFICIENT
Usher cites three effects that make Canada's equalization program efficiency-reducing:

a) People are induced to remain in poor provinces (the Maritimes) where their earnings and contributions to national income are low, when they might migrate to rich provinces (Alberta, Ontario, B.C.) where their earnings would be higher;
b) Recipient provinces are induced to levy inefficient taxes to maximize receipts under the rules of the equalization program; and
c) Every province acquires an incentive to appear poor by hiding part of its tax base.

NOT EQUITABLE
The author also debunks the argument that equalization payments are equitable. First, he says, the program does not equalize tax revenues per head among the richer provinces. Second, it does not mandate equal tax rates across provinces. Finally, the details of the program are so arcane and open to change as to provoke precisely that competition over public largesse that genuine equity would avoid.

"The Canadian Constitution is downright schizophrenic over public ownership of revenue from natural resources," says Usher. "Section 92(A) assigns these revenues unambiguously to the provinces, but in mandating equalization payments, Section 36(2) suggests that no province can reap the harvest of the resources under its jurisdiction."

ABOLITION OR REFORM?
The Uneasy Case for Equalization Payments considers two courses of action in response to Quebec's possible separation from Canada. In the event of separation, it is recommended that English Canada abolish the equalization program in its entirety.

Should Quebec remain a part of Canada, it is recommended that equalization payments be restricted to the Maritime provinces only, and be denied to Manitoba, Saskatchewan and Quebec. The total cost of the equalization program would be reduced from $8 billion to just over $1 billion.

The enshrinement of equalization payments in the 1982 Canadian Constitution was a mistake, says Dr. Usher. Equalization should be no less subject than any other transfer program or tax law to revision or abolition in accordance with the will of the majority in Parliament.

For a copy of The Uneasy Case for Equalization Payments, please contact David Hanley at (604)688-0221, ext. 582.

Contacts:
Dan Usher, Professor of Economics, Queen's University, (613) 545-2250
Michael Walker, Executive Director, The Fraser Institute, (604) 688-0221, ext. 545