There can be many reasons for society to subsidize parents for the cost of child care. The financial hurdle for a parent considering the merits of working versus staying at home to care for young children can be extremely high — especially at lower levels of family income, where incremental work hours are taxed heavily.
Mothers, in particular, are hard-hit by absence from the workforce and face larger wage penalties the longer they are away from paid work.
Child care then is clearly beneficial to families and the broader economy. So now the question becomes: What is the best approach to subsidize child care? Should we give money directly to parents, or indirectly through a centralized system of licensed daycare centres offering spaces at a subsidized cost?
Although both systems have their own advantages, a tax-based incentive, such as Ontario’s CARE credit, or federally, a generous refundable tax credit for child-care expenses, would be the most promising approach for Canadians.
If children need to be placed into daycare, at say, an annual cost of $7,000 per child, she would lose another 40 per cent of her pay to daycare costs, net of the benefit of the existing tax deduction, sucking up almost 84 per cent of her gains.
By subsidizing child care in all settings, a decentralized approach is also fairer for parents requiring flexible hours. Only a limited number of licensed centres in Ontario offer evening and weekend care; a stark contrast to home providers, of whom more than a quarter offer evening or weekend care.
For the federal government in particular, looking for effective ways to make a difference, offering a tax-based cash incentive, such as a refundable child care credit would make the most sense. Ottawa taxes incomes much more heavily than provinces. Therefore, it also stands to collect much more extra taxes from the employment boost a credit would generate.
In a previous study, Kevin Milligan and I estimated that replacing the inadequate federal child care expense tax deduction by a generous refundable tax credit would encourage many stay-at-home mothers to take on paid work and remain employed over the long term, alongside increasing government revenues.
Federally, such a scheme could “pay-for-itself” over the long term, especially after adding in the fiscal dividends for the provinces of extra tax revenues at no cost to them — dividends that could be invested in their own child-care systems.
In light of these advantages, I find that financial support to parents via the tax system is the most promising approach to subsidize the cost of child care.
Alexandre Laurin is the director of research at the C.D. Howe Institute.