Federal and provincial policy-makers should pay close attention to effective tax rates when considering changes to the tax-and-transfer system, according to a new report by the C.D. Howe Institute.
Geared-to-income fiscal benefits programs provide valuable financial assistance to families with children, noted the report, but these benefits often come with high marginal effective tax and participation tax rates, particularly for employees at lower income levels.
“Any further expansion of the targeted transfer system — through larger low-income supplements or the creation of new targeted family benefits, for example — should be approached with a broader analysis of the effect on parents’ work decisions,” said the report. “Relief measures meant to encourage work participation, such as Quebec’s newly created tax shield, should be explored. Greater tax relief for childcare expenses — a key factor in family paid-work decisions — could also be explored.”
As families earn more income, the report noted, they owe more tax and are entitled to lower government payments for fiscal benefits programs. These reductions, then, act like hidden tax rates because they reduce gains from employment, making it so that, for lower-income families, extra work is “often not worth the effort.”
For stay-at-home parents, this represents the financial penalty “that must be paid out of the total income derived from getting a job,” said the report.
In some cases, it noted, the lower-earning parent in a dual-earner family with three children, for example, could lose more than 70 cents of an extra dollar of earnings, and an unemployed parent could lose more than 65 per cent of a potential salary.
The report suggested that federal and provincial policy-makers avoid high effective rates by “better integrating new benefits programs;” monitoring the effectiveness of Quebec’s tax shield; and introducing a federal refundable credit for childcare costs, “with very generous rates for lower-earning families.”