A simple theory suggests that a common form of federal horizontal equalization grants should cause subnational governments to levy higher tax rates, distorting local tax bases and so increasing federal transfers. To test this, I examine Canadian provincial tax policies in the 1972-2002 period....

This paper shows how a popular system of federal revenue equalization grants can limit tax competition among subnational governments, correct fiscal externalities, and increase government spending. Remarkably, an equalization grant can implement efficient policy choices by regional governments,...

Assigning taxes to regional governments is a major issue in all federations. Although neither the literature nor international experience provides clear guidelines on precisely what taxes should be assigned to states, we suggest that Australia should nonetheless reconsider the advisability of...