The High Cost of Getting Ahead: How Effective Tax Rates Affect Work Decisions by Lower-Income Families

Posted on in Equality Debates

CDHowe.org – Media Releases/Working Moms Face High Tax Burden – Secondary earners in low-income families, usually the mother, face punishingly high tax burdens
February 11, 2016

Secondary earners in low-income families, usually the mother, face punishingly high tax burdens, according to the latest report from the C.D. Howe Institute. In “The High Cost of Getting Ahead: How Effective Tax Rates Affect Work Decisions by Lower-Income Families,” author Alexandre Laurin finds that various federal and provincial government benefit programs, once they are clawed back with income, act like hidden tax rates, reducing the gains from work.

“Because fiscal benefit programs pile up at the lower end of the income scale, the ‘all-inclusive’ tax rates for low- and middle-income families are generally higher than those of higher-income families,” explains Laurin. “Low-income families lose the most in fiscal benefits and pay more taxes as they take on work.” Laurin adds that, “this is particularly true for the secondary earner or stay-at-home parent in a family, usually the mother, for whom getting a job or working extra hours might not pay off.”

Consider a hypothetical married couple, Jennifer and Jeffrey, with two young children. Both Jeffrey and Jennifer have paid jobs. Jennifer, however, is considering increasing her workload to earn extra income. In some situations and provinces, after deducting taxes and wasted benefits, she might lose more than 70 cents per extra dollar of earnings.

The report notes that recent developments at the federal and provincial levels of government may provide some relief for Canadians such as Jennifer and Jeffrey. The new federal government has committed to reforming the child tax benefit system by eliminating the Family Tax Cut and the Universal Child Care Benefit, using the proceeds to reduce low-income clawback rates while raising base benefits. In its most recent budget, the Quebec government, recognizing the work disincentive stemming from high effective tax rates, introduced a new measure known as a “tax shield” that, starting in 2016, will partially protect workers who earn additional income by offsetting some of the loss of certain provincial income-tested fiscal benefits.

But other governments are continuing with the old approaches of piling up fiscal benefit reductions. Starting in mid-2016, the new Alberta Child Benefit will raise effective rates in Alberta for families with low to modest incomes. “Government should approach expanding or creating new targeted family benefits with caution,” notes the report. Quebec’s newly created “tax shield” is a model that other provinces should closely monitor and possibly emulate.

Click here for the full report:  < https://www.cdhowe.org/public-policy-research/high-cost-getting-ahead-how-effective-tax-rates-affect-work-decisions-lower-income-families >

< https://www.cdhowe.org/video-and-media-appearances/working-moms-face-high-tax-burden >

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