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William Watson on the Fiscal Imbalance
12/11/2004

Been much too busy to write anything recently, but on an airplane yesterday I came across an interesting column in the National Post.

I didn't check, but I doubt it's available online for non-subscribers. So, here's an excerpt of what William Watson wrote. It's an interesting way of setting up the "fiscal imbalance" question:

At bottom, the idea behind fiscal imbalance is that Ottawa has more money than needs and the provinces more needs than money. One of the most basic lessons we economists teach is that if you're spending your money correctly, the additional bang you get out of each additional dollar will be the same for everything you buy. If not you'll be happier if you shift a dollar from low-bang to high-bang activities. Only when the bang per buck is equal everywhere is further optimization impossible. The provinces' "fiscal imbalance" argument therefore reduces to the assertion that the bang per provincial buck exceeds the bang per federal buck.

Watson goes on to make points against this provincial argument, some of which I agree with, some of which I doubt. In any case, he goes on to express an opinion similar to what I wrote in March, although he does it in many fewer words:

Ottawa and the provinces share most tax fields. If the provinces really believe Ottawa has money it doesn't need, they should hike their own taxes and shame Mr. Martin into lowering his. If the feds really are wasting money left and right (though mainly left) voters will be sympathetic.

They could do this, if their interests weren't also in changing the equalization program (to get more money if you're Quebec, or to give less money if you're Stephen Harper).

Back to Watson:

And let's not forget the silent victims of fiscal imbalance. No, not just the cities, which the provinces chronically underfund. But also us taxpayers. ...

Yes, while the provinces have the powers they need to rectify the fiscal imbalance, municipalities do not. They have very limited powers to tax, and can't change that without permission from the provinces. That's the kind of change that John Sewell has been arguing for.

Some commentators say that if the City of Toronto were able to charge income tax, taxpayers would suffer terribly. I think it is a myth* that the "socialist" government of Toronto is an inefficient spender whilst the senior levels of government are more competent. Actually, I think that if Toronto were given these taxing powers a scenario could unfold like the one recommended by William Watson. As I wrote in January:

If you live in a city like Toronto -- wealthy, but also with social spending needs -- this plan wins for you. A low income tax will give the city all the money it needs. In fact, it will give the city so much that it will start to wonder why it is sending money to Ottawa and Queen's Park. Sooner or later the higher levels of government would be forced to lower their taxes.

On the other hand, if you live in a city that has social needs without the high tax base, or if you live in a rural area, this plan can really hurt in the long run. Once wealthy-city taxpayers elect tax-cutting parties to power in Ottawa and the provincial capitals, it will be the poorer areas that really suffer. They won't have the transfers they used to get, nor the taxation potential they need.

Whether or not you think this is a good thing depends on what kind of Canada you think we should have, and on how bitter you may be about the way things are presently.

(* -- Well, it's certainly not a myth that under the Lastman regime we had some problems. Why does Wanda Liczyk have a job?)


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