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Prepared by M. Kaufman, P. Swagel, and S. Dunaway. For a more detailed description of the statistical analysis, see forthcoming working paper.
In order to avoid adverse incentives in situations where a tax base is concentrated in one province and that province’s decisions significanlly affects the national average tax rate, a “Generic Solution” applies in cases where a province generates more than 70 percent of a particular type of revenue. For such a province, every $1,00 a province generates in revenues from that revenue source reduces its equalization payment by only $0,70,
The floor provision limits the amount that a province’s entitlement can decline from year to year to 1.6 percent of the per capita value of the equalization standard. Floor payment entitlements are calculated before the application of any ceiling restrictions to total equalization entitlements. Since the introduction of the floor provision in 1982, there have been nine floor payments to provinces,
The EI system also provides other programs aimed at broader social objectives, including tmining and selfemployment assistance, as well as sickness, maternity, and parental leave.
For a detailed analysis, see Canada-Selected Issues, SM/OO/6.
Given the endogeneity introduced by using transfers and migration in the convergence equation, a three-stage procedure for estimating the panel was used. In addition, weighted least squares was applied using provincial GDP.
The estimated coefficients for EI transfers in the migration equation are significant in both specifications, but the magnitude of the effect varies considerably. In the specification with fixed effects, the coefficient is significantly larger than in the one with a common constant term.
Under an alternative specification without a migration channel, EI payments were found to have a significant and negative direct impact on convergence, but thc result was not maintained with the inclusion of fixed effects.