Lower-income families whose children want to earn more money are unfairly penalized according to a new report
The way that the Canadian government treats lower-income families who want to improve their finances is unfair says a new report.
CD Howe Institute authors Alex Laurin and Nicholas Dahir conclude that benefit reductions serve as hidden tax rates and discourage working to generate additional income.
In “Softening the Bite: The Impact of Benefit Clawbacks on Low-Income Families and How to Reduce It,” they call for a change in how Ottawa supports lower-income families in their quest for a better life.
They highlight how both the “marginal” effective tax rate (METR) and the “participation” tax rate (PTR) impact those who want to work to earn more for their families and amounts to a financial penalty for working more hours.
“In Ontario, the family METR on extra earned income peaks at 79% for two-children two-parent families and at 96% for single-parent families. In Quebec, it peaks at 88% and 71%, respectively,” said Laurin and Dahir. “In other provinces, it tends to peak at around 60-70%. METRs reach their peak at relatively low levels of family income for two-parent families and at around average income levels for single-parent families.”
The amount that is lost in additional taxes and benefit clawbacks by taking on more work varies by the province of residence, the initial level of family income, the number of children, the number of earners in a family and how earnings are split among earners.
However, the authors found that METR is generally higher for lower-income families than for higher-income earners.
Recommendations
The report makes three key recommendations:
- Implement “benefit shields,” similar to that introduced by Quebec in 2016, that would focus on the Child Tax Benefit and the Canada Workers Benefit. Under the shield approach, a sudden jump in employment earnings would be excluded for the purpose of calculating income-tested benefit reductions in the first year of recipients’ higher income earning capacity, such that family benefits for the CCB and the CWB would remain the same for that year. The shields would likely stimulate parents to take on more paid work. The immediate cost of such benefit shields would likely be small in comparison to the long-term repeated annual government revenue yield of higher family earnings.
- Allow income averaging to lessen the impact of fluctuating incomes on tax liability. Workers could average their income over many years, so that any single large earning year would not lead to a disproportionate loss of fiscal benefits and higher tax payments.
- Replace the federal childcare expense tax deduction with a refundable credit with very generous rates for lower-earning families – designed along the lines of the Quebec and Ontario childcare expenses credits – diminishing up the income scale to higher-earning families, who would still reap some benefit.
