The Provincial Welfare Trap Revisited.
In 2002, AIMS, the Frontier Centre for Public Policy (FCPP) and the Montreal Economic Institute collaborated on AIMS’ major “Equalization Initiative”, designed to draw the attention of Canadians to the inequities, inefficiencies and perverse incentives contained within our country’s equalization program. AIMS won the Sir Antony Fisher Memorial Award for our Equalization Initiative, and we are pleased to see that the ideas we helped to champion continue to reverberate with Canadians. Peter Holle, the head of the FCPP, recently pursued these ideas in a series for the National Post, which AIMS is delighted to reproduce here, a wonderful example of the cross-fertilization, which is more and more characterizing the think tank movement in this country.
Well-intended transfer payments shift resources from “have” to “have-not” provinces to ensure a reasonably similar level of services across the country. While that sounds noble, the downside lies in the program’s creation of perverse incentives. Equalization locks “have-not” provinces into enormous welfare traps that encourage increased dependency on its funding. A 2002 study by AIMS, for example, shows how recipient provinces maximize their subsidies by raising taxes on weak tax bases. On average, in equalization-receiving provinces personal taxes are one-third higher, capital taxes are more than twice as high and sales are half again as high as in “rich” provinces. Are we surprised that capital, jobs and growth gravitate toward Ontario and Alberta?
The global experience with equalization is just as poor. In Belgium, Flanders heavily subsidizes the regions of Wallonia and Brussels. Governments in the latter two raise taxes and aggressively regulate the economy with the knowledge that poor economic performance increases Flemish transfers. In Sweden, the residents of prosperous Stockholm refer to the equalization program as the “Robin Hood Tax,” (an odd metaphor since the legendary rebel stole from the taxman, not the other way around). Equalization also strains the Australian federation. Tasmania, the poorest state, receives 65% of its revenues from transfers. Not surprisingly, the easy outside money allows the state to impose comparatively high taxes and restrictive labour and environmental legislation — all amid an accelerating drain of young people and entrepreneurs.
In a series of articles for the National Post, FCPP’s Peter Holle and Mike Nahan, the executive director of the Institute for Public Affairs, an independent think-tank based in Melbourne, Australia, discuss how equalization does not work, and how it might be transformed.
Read Equalization buys big government by Peter Holle published April 14, 2004
Read Tasmania’s devil is in the details by Mike Nahan published April 15, 2004
Read Transforming equalization by Peter Holle published April 16, 2004
At the same time, the Frontier Centre for Public Policy issued three background papers focusing on the three international case studies.