The 'political/fiscal prisoners' dilemma' over taxes

Economist Hugh Mackenzie with the Canadian Centre for Policy Alternatives compiled an interesting report which states that provinces are to blame for fiscal imbalance. A Canadian Press release says:

“...Mackenzie says provinces are under intense pressure to keep their tax rates competitive with one another. With highly mobile companies and individuals prepared to move to the lowest-tax jurisdiction, no province wants to be the first to raise taxes.
"Provincial governments are caught in a kind of political/fiscal prisoners' dilemma in which no individual province has an incentive to take action which would benefit all provinces if they all did it, [says Mackenzie].”

So, what can be done?

“Mackenzie dismisses remedies proposed by a provincial report, which called for almost $10 billion more a year from Ottawa in equalization payments to have-not provinces and cash transfers to all provinces, and the Canadian Council of Chief Executives, which called on Ottawa to elminate the GST and let provinces fill the resultant tax void. The first "misses the mark'' and the second is "virtually guaranteed to make the situation worse.''

His report includes two suggestions:

1. the introduction of an interprovincial tax treaty that would limit tax competition among the provinces; and/or
2. the establishment of national “umbrella taxes” which would protect provincial tax room by allowing the deduction of pre-determined levels of provincial taxes from federal taxes payable.