Social Policy in Ontario

Last week, Progressive Conservative Leader Doug Ford proposed eliminating the provincial income tax for minimum wage earners in Ontario. The devil is in the details.

The average minimum wage earner will pay more than $400 annually in provincial income taxes, despite only working 26 hours a week – an amount that can make a world of the difference for those living below the poverty line. Ford’s proposal to exempt minimum-wage earners from the provincial income tax could provide significant relief to these workers.

Getting this policy right can lift Ontarians out of poverty or, perversely, trap them there.

We only know the basics. Ford’s plan is a tax credit, providing up to $800 per person in relief, costing $500 million to the treasury. What we don’t know should cause us concern.

The first issue is who will benefit. Is it only minimum-wage workers, or will it include part-time workers with the same annual earnings? What about those who make slightly more than the minimum wage? This is an important detail, as poorly designed policy can make taxpayers face what is known by economists as the welfare cliff.

If those who make $14 per hour are eligible for tax relief, but workers who make $15 per hour are subject to the status quo, workers will be better off with the lower-paying job. The spike in the marginal tax rate between these workers is enormous. If the credit is based on annual instead of hourly earnings, workers might even reduce their hours to increase their after-tax income.

The second issue is the policy’s cost. Avoiding the welfare cliff is expensive: to avoid a sharp decline in after-tax earnings, it is necessary to provide tax credits to people making slightly more than the minimum wage.

A simpler way is to raise the basic minimum exemption (the amount every person isn’t taxed on) to what an average minimum wage worker earns. But the cost of this would be an astronomical $2.8 billion dollars, as all would save. Simply eliminating income taxes for all minimum-wage earners would cost $442 million – close to the $500 million proposed by Ford. Given those figures, he will likely target a credit to specific minimum-wage earners, creating a welfare cliff.

Providing tax relief to low-wage labourers is long overdue, but this is no excuse for bad policy. Luckily for Ford, there are ways to provide relief to the working poor without introducing a welfare cliff.

The Working Income Tax Benefit, administered by the federal government, is such a program. It phases out gradually to keep the cost of the program low without compromising an earner’s incentives to work. While it does not completely eliminate income taxes on minimum-wage earners, it is better targeted at the working poor and provides relief without the welfare cliff.

Overlooking the welfare cliff incentivizes the working poor to work less and stay poor, and Ford would do best to recognize this.

Heather Bone is an master of economics student at the University of Toronto.

https://www.thestar.com/opinion/contributors/2018/04/22/pitfalls-for-fords-mimimum-wage-tax-break-plan.html