Dealing with the fiscal imbalances

With regard to the structural fiscal imbalances, the key issue is excessive reliance on certain forms of taxation — the retail sales taxes levied by five provinces, the capital and corporate income taxes levied by the federal and provincial governments, and the heavy taxation of the financial institutions. [...] We can think of this efficiency loss as a decline in the size of the economic pie — the value of goods and services produced and consumed in the economy, including the value of leisure time and the quality of the environment. [...] The importance of the fiscally induced migration rationale for equalization will depend on the size of the efficiency loss, which in turn depends on the extent of labour market mobility and the magnitudes of the net fiscal benefit differentials. [...] The Representative Tax System (RTS) formula, which has been the basis for the calculation of equalization grants, will equalize the provincial MCFs if the tax bases in all of the provinces have the same degree of tax sensitivity. [...] The failure of the RTS system to account for variations in the tax sensitivity of tax bases that are nominally the same, but qualitatively different, has led to the proliferation of tax bases.