Abstract: This essay investigates the role government taxes and transfers played in reducing provincial inequality in Canada during 1926-1990. The rates of inter-provincial income convergence are compared for three income measures.
      Government policy had a significant impact in fascilitating provincial income convergence. A cross-sectional NLS estimation reveals that roughly one-half of the observed income convergence over this period was due to government tax and transfer policies. Income convergence accelerated in the 1960s, coincident with the convergence of human capital measures across provinces at that time.
      However, the successes of government policy in reducing income disparities may have restrained further convergence forces by inhibiting economic flexibility - particularly labour mobility - in some regions in Canada. A time series approach investigates the possibility of long-run 'equilibrium' relationships for income convergence. Unit root test are performed for income convergence between a given province and the national average, and a given province and neighboring provinces. The results show Western provinces were more tightly intergrated, consistent with a more mobile labour force and homogeneous economic structure. Unfortunately, some Atlantic provinces appeared to reach an equilibrium relationship below the national average.
      In sum, the same policies that were beneficial in reducing provincial income disparities may also provide disincentives that prevent further convergence.