Too Many Municipalities?

Does democracy lead to the creation of too many municipalities? We analyze this issue within the context of the Alesina and Spolare (1996) model where the quality of municipal services deteriorates with the distance from the center of a municipality. Individuals can vote in a referendum to split an existing municipality. We show that social welfare will decline when municipalities are split if the level of the public service, as chosen by the median voter, is lower in the new smaller municipalities. In general, the model indicates that there may be a democratic bias in favour of creating too many municipalities.median voter model; fiscal federalism; succession; municipal boundaries

The Canadian Federal-Provincial Fiscal Equalization System

Finanzausgleich, Horizontaler Finanzausgleich, Kanada, Fiscal transfer, Horizontal fiscal transfer, Canada

Once on the Lips, Forever on the Hips: A Benefit-Cost Analysis of Fiscal Stimulus in OECD Countries

The author evaluates the fiscal stimulus policies of 20 OECD countries within a simple benefit-cost framework. Among his findings: in Canada, to be justifiable on a benefit-cost basis, a fiscal stimulus project that improves consumptive public services must provide at least 73 cents in benefits for every dollar of fiscal stimulus.tax competitiveness program, OECD, fiscal stimulus measures

The Marginal Cost of Public Funds and the Flypaper Effect

A lump-sum intergovernmental transfer has a "price effect", as well as an "income effect", because it allows the recipient government to reduce its tax rate, which lowers its marginal cost of public funds, while still providing the same level of public service. This reduction in the effective price of providing the public service helps to explain the "flypaper effect" - the empirical observation that a lump-sum grant has a much larger effect on spending than an increase in personal income. Contrary to the assertions of Mieszkowski (1994) and Hines and Thaler (1995), a model of a benevolent local government financing its expenditures with a distortionary tax predicts flypaper effects from lump-sum grants that are similar to those observed in many econometric studiesflypaper effect; marginal cost of public funds; intergovernmental grants; fiscal federalism

The Optimal Taxation Approach to Intergovernmental Grants

An optimal tax system equates the marginal cost of public funds across all tax bases. This idea is applied to a federation to derive the optimal unconditional transfers that will promote an optimal allocation of taxation and expenditures among the governments in the federation. This approach provides insights into the concepts of vertical and horizontal fiscal imbalance, fiscal capacity, and fiscal need. Expressions for the optimal fiscal equalization grant and the optimal vertical fiscal gap are derived. We also show how the marginal cost of public funds affects the optimal matching grant rate for activities that generate expenditure externalities.intergovernmental grants; median voter model; fiscal federalism; vertical fiscal gap; vertical fiscal imbalance; fiscal capacity; fiscal need

What Does it Cost Society to Raise a Dollar of Tax Revenue? The Marginal Cost of Public Funds

The marginal cost of public funds measures the welfare loss a society incurs in raising an additional dollar of tax revenue. Tax increases distort economic decisions and erode tax bases because of tax avoidance and tax evasion by taxpayers. This Commentary uses econometric estimates of the effects of higher provincial tax rates on the provinces’ corporate income tax, personal income tax, and sales tax bases to calculate the marginal cost of public funds (MCF) for these taxes. The results indicate that the cost of increasing provincial tax revenues through a corporate tax rate increase is very high, and in some provinces, corporate tax rate reductions in 2006 would have increased the present value of the provincial government’s total tax revenues. The results also suggest that significant welfare gains would accrue from reducing provincial corporate income tax rates. As well, increasing provincial corporate and personal income tax rates can cause significant reductions in federal tax revenues because the federal and provincial governments levy taxes on the same tax bases. Finally, Canada’s system of the equalization grants might reduce the perceived MCF of recipient provinces.Fiscal and Tax Competitiveness, marginal cost of public funds (MCF)

Reforming Equalization: Balancing Efficiency, Entitlement and Ownership

In this paper, we provide an overview of the equalization grant system in Canada and the issues that have been raised concerning the reform of the fiscal transfer system. Any reforms to the equalization grant system have to balance three concerns — “efficiency” effects that arise through federal financing of transfers, and the incentive effects on provincial fiscal policies, “entitlement” to reasonably comparable public services at reasonably comparable levels of taxation, and “ownership” of resources and independence of fiscal policies by provincial governments. Five proposals for reform of the equalization system are discussed. With regard to the inclusion rate for resource revenues in equalization formula, we argue that the rate should be reduced from 50 per cent to 25 per cent and that ceiling on total equalization payments should be eliminated. We argue against the proposal to exempt from the calculation of equalization entitlements that are deposited in provincial sovereign wealth funds because this would not reduce total equalization entitlements in present value terms, it would be complex to implement if it extended to all forms of savings by provinces (such as debt reduction), and it would not alter the resource rich provinces’ incentives to save more of their resource revenues. We argue against a proposal to reduce CHT and CST to provinces with above average fiscal capacities because this would reduce their incentive to develop and tax their resources, and it would be counter to the purpose of these block grants, which is to reduce the vertical fiscal imbalance between the federal and the provincial governments. We review the Gusen (2012a) proto-type model for incorporating variations in costs and needs in the computation of the equalization entitlements and argue that this procedure seems feasible and merits further analysis

Fiscal Policy Trends: The Path to Balance or the Road to Ruin?

The NDP government’s plan to balance the provincial budget by 2023-24 is based on drastically cutting capital spending and on optimistic revenue projections.In order to show that these are the key elements of the “Path to Balance”, we need to know how interest payments on debt, total operating expenditures, and the cash deficits will evolve under the government’s plan, but these key fiscal variables are not reported in the budget documents

Reforming the Federal Fiscal Stabilization Program

The federal Fiscal Stabilization Program is meant to provide financial support for provinces that suffer extraordinary declines in revenues. However, the program only provided $248 million payment to Alberta in 2015-16 in the face of a$8.8 billion decline in revenues, and no support for Saskatchewan and Newfoundland and Labrador that have also suffered significant revenue reductions in recent years. We discuss the rationale for a Fiscal Stabilization Program, and three principles that should be adopted in re-designing it: · Payments should be based on declines in a province’s own-source revenues from an average of its past years’ own-source revenues · The program should preserve incentives for provinces to maintain prudent fiscal policies by only covering losses that exceed some percentage of “normal” own-source revenues (a deductible) and then only covering a fraction of eligible losses (co-insurance). · Formulas determining payments should be simple and transparent with no adjustment for changes in provincial tax policies that may affect own-source revenues. We propose some alternative formulas, consistent with these principles, for calculating the fiscal insurance payments and show the support levels that they would have provided to the provinces since the mid-1980s