A properly constructed equalization program restores fiscal neutrality to the choice of 'who taxes what', leaving us in a libertarian's ideal position of minimizing government's interference in the economy.Adrian Wyld
Kevin Milligan is Associate Professor of Economics at the University of British Columbia
Conservative MP Maxime Bernier recently offered the provocative suggestion of fundamentally changing federal transfers, including the federal equalization program. Many people defend equalization by leaning on some notion of sharing. That's a fine argument, but I don't think it is the best argument. Strong notions of sharing aren't necessary to construct a sound argument for equalization programs. In fact, even sharing-averse libertarians can find something to like in equalization.
Libertarians want the touch of government on society to be as light as possible. One way government affects society is through the choice of what to tax -- and which government gets to tax.
If provincial governments are accorded the ability to tax natural resources, provinces rich in the hot commodity of the day (be it oil, fish, mineral, or lumber), can lower taxes on productive and mobile capital and labour. Provinces without the hot commodity can't lower their taxes as easily. On the other hand, if the federal government alone has the power to tax natural resources, then there won't be tax-based disparities across provinces.
This argument doesn't imply the feds should tax everything, though. Instead, we can find a way to allow provinces the right to tax resources without imposing big tax distortions on the national economy. The way to remove these government distortions is with an equalization program. A properly constructed equalization program restores fiscal neutrality to the choice of 'who taxes what', leaving us in a libertarian's ideal position of minimizing government's interference in the economy.
Before dismissing this argument as fanciful, please check its source -- I am restating the argument made first by Nobel Laureate James M. Buchanan in a series of papers starting in 1950. Mr. Buchanan is one of the fathers of public choice theory, and someone whose writings reveal him to be a staunch critic of big government. His argument depended not on fuzzy notions of 'sharing', but on cold and calculating economic efficiency.
The equalization argument has been refined through the years (most notably by Robin Boadway and Frank Flatters of Queen's University), but the basic thrust remains the same -- the absence of equalization would lead to inefficiently high taxes and worse economic efficiency. These high taxes would deter mobile capital and labour, leading to lower than ideal economic output.
This efficiency view forms an important part of how economists think about equalization programs. Of course, implementation of equalization programs can raise some serious problems. In fact, by 2001, Mr. Buchanan himself had changed his mind because of concerns about political interference and 'welfare traps'. However, it is important for all Canadians in the debate to realize that favouring equalization does not necessarily require a big dose of 'sharing' - -a low-tax, pro-efficiency approach can be made central to the case for equalization.