Equalization too complex to be legit 0
Satirist P.J. O'Rourke says, "Beyond a certain point complexity is fraud ... when someone creates a system in which you can't tell whether or not you're being fooled, you're being fooled." So take Canada's multi-billion-dollar equalization program ... please. It's so complicated even experts have trouble with it, and regular citizens are excluded completely.
It started innocently enough. Back in 1957, to protect basic public services, Ottawa started giving provinces grants if their per-capita revenue from income, corporate income and inheritance taxes was below what the two richest (then Ontario and B.C.) got from those taxes.
This "fiscal capacity" standard is simple enough that a normal person can see how it works, although it is suspicious that nine of 10 provinces promptly qualified for money meant to fend off financial disaster. Indeed, within a decade, the feds lowered the benchmark from the two richest to a national average, reducing the number of recipients to seven.
They also added natural resource revenue to the "fiscal capacity" calculation. But only half of it, partly because natural resource royalties are halfway between a tax and a fee and partly because raw material prices tend to fluctuate widely and financial uncertainty is bad.
So far so good. But politicians and bureaucrats kept fiddling, raising the number of revenue sources to 29. Then in 1982, while foolishly including equalization in the Constitution, the feds changed the 10-province "fiscal capacity" standard to one based on Ontario, Quebec, Manitoba, Saskatchewan and B.C., excluding high-income Alberta with its unstable oil revenue but also the less-prosperous Atlantic provinces.
They fiddled on, adding more tax bases, building in "ceilings" and "floors", and striking side deals with Nova Scotia (in 1982) and Newfoundland (in 1985) to develop offshore oil and gas without taking a huge hit to their equalization payments. These deals, renegotiated in 2005, amounted to admitting the program rewards failure and penalizes enterprise.
Politicians like that sort of thing. When equalization began to contract in the early 2000s, as Ontario's recession and provincial tax-cutting drove down the "fiscal capacity" benchmark, Paul Martin's Liberal administration ditched it on the input side, instead stuffing in $10 billion the first year, guaranteeing 3.5% annual growth for a decade and promising no provincial payment would drop below the 2004-05 figure. And they fixed payments for the first two years, suspending the "fiscal capacity" formula on that side, too, in favour of raw politics.
In 2007, Stephen Harper's administration restored a 10-province national average "fiscal capacity" calculation commendably simplified to five bases: personal income tax, business income tax, sales tax, and property taxes, plus natural resource revenue. Except in the last category, where royalty systems are so idiosyncratic there's no such thing as a typical structure, they count actual revenue but only half of it.
Any province with less-than-average "fiscal capacity" gets the difference from Ottawa, using a weighted three-year average. But the feds also let each province include or exclude natural resource revenues, whichever pays better. Thus settling the theoretical dispute by throwing money at it rather than appealing to fairness, efficiency or both.
The program has other flaws as well, like ignoring the lower cost of living, for people and governments, in "have-not" provinces. But the main problem is complexity.
Some math is unavoidable here. But equalization fails John Locke's key test of liberty under law: "A standing rule to live by, common to every one of that society ... not to be subject to the inconstant, uncertain, unknown, arbitrary will of another man."
Equalization is not a standing rule. It keeps changing.
It's not common. Loud or whiny provinces get special deals.
As for unknown, in 2006 the Council of the Federation Advisory Panel created by Canada's premiers admitted they'd just "discovered a supplementary program of equalization" associated with the Canada Health Transfer and commented acidly: "The panel is not certain that this second-level equalization to the top-province standard has ever been explained to the provinces." If experts and premiers don't understand it, voters sure won't.
Finally, equalization is arbitrary. Devised with theologian Soren Kierkegaard's "covetous eye on the outcome," it provides dense technical cover for political shenanigans involving billions of dollars.
This much complexity is fraud, plain and simple.