August 22, 2019 – Low-income Canadian families with children encounter high “all-inclusive” tax rates that could discourage parents from working more or entering the workforce, argues a new C.D. Howe Institute report.
In “The Paycheck Blues: Why Extra Work is often Not Worth the Effort for Lower-income Families,” author Alexandre Laurin finds that parents with children may lose a significant chunk of their take-home pay through taxes and reduced fiscal benefits.
As families earn more income, benefit entitlements, such as the Canada Child Benefit, are clawed back at various phase out rates. These benefit reductions act like hidden tax rates by reducing the gains from work. The marginal effective tax rate (METR) measures the impact of taxes and benefit reductions from earning an extra dollar. The participation tax rate (PTR) measures this impact on the entire prospective annual income from taking on a new job.
“Because benefit programs pile up at the lower end of the income scale, low-income families’ METRs and PTRs generally have been higher than those of higher-income families,” says Laurin. “In some cases, the lower-earning parent in a dual-earner family with three children might lose more than 70 cents of an extra dollar of earnings, and an unemployed parent more than 65 percent of a prospective salary for taking on a job.” For lower-income families, particularly among mothers and secondary earners in a family, this means extra work may not be worth the effort.
Laurin finds that 16 percent of working lone-parents or the lower-earning parents in dual-income families face a METR above 50 percent, and 12 percent of stay-at-home parents face a PTR above 50 percent. And these proportions have risen substantially since the mid-1980s and early 1990s, when very few families faced a METR or PTR greater than 50 percent.
The report recommends federal and provincial policymakers should:
- Better integrate new federal and provincial benefit programs to avoid very high effective tax rates;
- Monitor the effectiveness of Quebec’s tax shield. The tax shield partly compensates workers for the loss of work premium and tax credit for childcare expenses in the first year after they take on more work; and
- Subsidize childcare costs by introducing a federal refundable credit with very generous rates for lower-earning families.
For more information contact: Alexandre Laurin, Director of Research, C.D. Howe Institute; or Nancy Schlömer, Communications Officer, C.D. Howe Institute, phone 416-865-1904 ext. 0247, email: nschlomer@cdhowe.org.
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.