A new C.D. Howe Institute report argues that low-income Canadian families with children encounter high “all-inclusive” tax rates that could dissuade parents from working longer or entering the workforce altogether.
Alexandre Laurin, director of research at the Institute and author of the report “The Paycheck Blues: Why Extra Work is Often Not Worth the Effort for Lower-income Families,” found that parents with children may lose a significant chunk of their take-home pay through taxes and reduced fiscal benefits.
Laurin identified the “marginal” effective tax rate (METR), which “conveys the loss, through additional taxes and diminished benefits, associated with an extra dollar of earnings” — in other words, “the financial penalty that must be paid for working extra hours,” he wrote.
Laurin also identified the “participation” tax rate (PTR), the cumulative effect of all taxes, payroll deductions, fiscal contributions and loss of fiscal benefits on all earnings from work. “For a stay-at-home parent, it represents the financial penalty that must be paid out of the total income derived from getting a job,” he noted in the report.
Low-income families’ METRs have generally been higher than those of higher-income families, because benefit programs pile up at the lower end of the income scale.
“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% of a prospective salary for taking on a job,” Laurin wrote.
The report found that nationally, 16% of working single parents, or the lower-earning parents in dual-income families, experience an METR above 50%. Further, 12% of stay-at-home parents face a PTR above 50%.
“These proportions have risen substantially since the mid-1980s and early 1990s, when very few families faced a METR or PTR greater than 50%,” Laurin wrote.
The report provides several policy recommendations.
“Federal and provincial governments should be careful not to pile up income-tested fiscal benefit programs on top of one another,” Laurin wrote, noting that clawback rates can create effective tax rates above 50% at lower income levels.
He also suggested that policymakers monitor the effectiveness of Quebec’s Tax Shield, which partly compensates workers for the loss of the work premium and the tax credit for childcare expenses in the first year they take on more work.
Finally, Laurin proposed a refundable credit at the federal level for childcare costs “with very generous rates for lower-earning families.”