Social Policy in Ontario

The effect on work and employment has been large and sustained. Multiple studies have documented a clear increase in the proportion of women with younger children who are now employed. This lifts family incomes, contributes to gender equity in the home and workplace and brings in new public revenues through taxation.

When evaluating the costs of the Quebec program, the tax revenue implications draw much attention.

Economist Arthur Laffer once predicted that cuts to tax rates on high earners in the United States would lead to so much more work that the lower rates would still bring in more revenue because of the expansion of economic activity. Subsidies to child care have a similar flavour. There is a “reverse Laffer effect” for child-care subsidies as the employment gains for young parents are strong enough to recover at least some of the costs of the subsidy.

While evidence of employment impacts seems strong, the reverse is true for educational impacts. One of the main arguments for the Quebec model was a big boost to child development and school readiness. The evidence on that front has failed to yield indications of widespread or lasting benefits. There are signs that gains can be found for children from more disadvantaged families, but broad improvements across the spectrum are not evident.

How can this be? The results from several long-run U.S. studies showcase high-quality child-care programs for disadvantaged children revealed large gains. Intuition and evidence suggest that children are more likely to thrive in supportive environments, such as those provided by quality daycares. But, children from many families also have supportive environments at home, so the switch into child care doesn’t yield much change for them. Nobel laureate James Heckman has argued that the impact of quality child care for disadvantaged children comes through behavioural improvements, allowing children from more challenging situations to close some of the school-readiness gap with their peers. The results of studies on disadvantaged students just don’t seem to apply to a universal program.

Given the divergent success of the two components of the Quebec model, the right approach for policy has two prongs.

For employment, it’s simply a question of getting the price of child care right. The tax system is the easiest way to do that, using the federal Child Care Expense Deduction. A basic principle of taxation is that we tax companies on their profits after expenses, not on their revenue. In the same way, families should not face taxes on the expenses they require to earn income. Without appropriate relief for expenses, the tax system fails to be neutral and biases the family’s decision against work. The cap on the child-care deduction has been frozen at $7,000 since 1998. It’s not rare for families to spend twice that amount on child care. A doubling of this expense cap is consistent with tax principles and would give families back the resources to make their own child-care choices.

On the second front, providing high-quality care environments for disadvantaged children can’t be left to the market alone; more direct public intervention is required. Targeting could be achieved either geographically (by placing resources in localities that need them most) or economically (through income-contingent vouchers). These needs vary drastically across the country and are best assessed by governments closer to the action rather than in Ottawa. There is national interest, though, in providing all Canadian children with a good start in life in order to preserve and extend the Canadian advantage of social and economic mobility.

Before launching a new federal program costing billions of dollars, it’s always important to ask where the money will come from. Taxing the rich or corporations is unlikely to yield enough tax revenue to pay for a large-scale national child-care program, so the money would need to come from the middle class. Those middle-class family budgets are already stressed, so any new child-care initiatives should focus first on the interventions with the biggest social and economic payoffs

Kevin Milligan Associate professor at the UBC Vancouver School of Economics

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