Lower-income families that want to earn more could be caught between misaligned government policies
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Generally speaking, government subsidies and benefits are meant to help families improve their living situation. But according to one policy think tank, families in the lower income range may actually end up getting punished as they try to get on their feet.
In a new report titled Two-Parent Families with Children: How Effective Tax Rates Affect Work Decisions, CD Howe Institute’s Director of Research Alexandre Laurin looked at different family income levels, and how take-home pay would be affected by each dollar of extra income.
Laurin determined the impact on take-home pay by combining the effects of taxes paid and government benefits lost, producing marginal effective tax rates (METRs). “Because benefit programs are targeted at the lower end of the income scale, low- and middle-income families’ effective tax rates are generally higher than those of higher-income families,” the institute said.
The report observed the largest METRs among families whose income fell between $35,000 and $50,000. In Ontario, METRs on extra earned income peaked at 64%; the maximum for Quebec was 73%. In other provinces, the largest effective tax bite faced by parents looking for additional employment income tended to be just over 50%.
“In 2017, about 9% of employed parents contemplating earning a few extra dollars, and about 13% of stay-at-home parents contemplating getting a job, faced an effective tax rate higher than 50%,” Laurin noted in a letter addressed to the ministers of finance.
To prevent the unintended consequence of discouraging work, Laurin said, Canadian governments could expand subsidies for childcare costs for lower-income families. “A federal refundable credit for childcare costs with very generous rates for lower-earning families – designed along the lines of the Quebec childcare expenses credit would be a good start,” he said. “A more generous tax treatment would likely encourage about 15 to 22 percent of stay-at-home mothers to join the workforce and stay employed over the long term.”
One other approach is to allow income averaging, whereby workers would be able to offset large earnings increases in a single year and avoid disproportionately higher tax payments or excessive losses in fiscal benefits.
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In a new report titled Two-Parent Families with Children: How Effective Tax Rates Affect Work Decisions, CD Howe Institute’s Director of Research Alexandre Laurin looked at different family income levels, and how take-home pay would be affected by each dollar of extra income.
Laurin determined the impact on take-home pay by combining the effects of taxes paid and government benefits lost, producing marginal effective tax rates (METRs). “Because benefit programs are targeted at the lower end of the income scale, low- and middle-income families’ effective tax rates are generally higher than those of higher-income families,” the institute said.
The report observed the largest METRs among families whose income fell between $35,000 and $50,000. In Ontario, METRs on extra earned income peaked at 64%; the maximum for Quebec was 73%. In other provinces, the largest effective tax bite faced by parents looking for additional employment income tended to be just over 50%.
“In 2017, about 9% of employed parents contemplating earning a few extra dollars, and about 13% of stay-at-home parents contemplating getting a job, faced an effective tax rate higher than 50%,” Laurin noted in a letter addressed to the ministers of finance.
To prevent the unintended consequence of discouraging work, Laurin said, Canadian governments could expand subsidies for childcare costs for lower-income families. “A federal refundable credit for childcare costs with very generous rates for lower-earning families – designed along the lines of the Quebec childcare expenses credit would be a good start,” he said. “A more generous tax treatment would likely encourage about 15 to 22 percent of stay-at-home mothers to join the workforce and stay employed over the long term.”
One other approach is to allow income averaging, whereby workers would be able to offset large earnings increases in a single year and avoid disproportionately higher tax payments or excessive losses in fiscal benefits.
Related stories:
Income tax changes don't help lower-income families rise up, say policy experts
Higher federal taxes hurt middle-class families – study
