Commentary
By Philip Bazel
Effective tax rates across provinces show that many low-income families in Canada take home 40 cents or less on the additional dollars they earn.
The marginal effective tax rate – which accounts for how much you pay in additional income taxes and lose in federal and provincial transfer benefits when you earn an extra dollar – is highest for families earning modest incomes.
This is concerning from a policy perspective, given how the tax and transfer system changes the incentives for individuals and families to take on productive income-earning work.
Marginal effective tax rates (METRs) across provinces offer very low net-of-tax returns to earnings in the low-to-middle-income range. That reduces incentives and possibly discourages Canadians from earning extra income.
For a family of four with two earners making roughly $40,000 and two children, the METR on additional earnings exceeds 50% in Prince Edward Island, Nova Scotia, New Brunswick, Ontario, Manitoba, and Alberta. This same family would face a METR exceeding 70% in Quebec and just shy of 70% in Newfoundland.
Conversations and analyses on the personal income tax system in Canada tend to focus on statutory tax rates – the progressive system where incremental income is taxed at increasingly higher rates. But in assessing the overall impact of the tax-and-transfer system on individuals and families, the statutory rate on income is only part of the story.
The real question is how much money do we bring home when we earn an additional dollar?
To answer, we must account for all income-tested transfer benefits such as the federal Canada Child Benefit or Alberta’s Family Employment Tax Credit. Because these benefits are clawed back as additional income is earned, we factor in these reductions in addition to statutory income taxes. Both reduce the amount of money that actually makes it into an earner’s pocket.
We can think of it like this: when a dollar earned triggers higher taxes and simultaneously reduces benefits, what’s left to spend or save? This is the net-of-tax-and-transfer earnings, and it’s the result of complex interaction between earnings, transfer programs, tax credits and taxation of income.
As net-of-tax-and-transfer earnings fall below 50, 40 and even 30 cents on the dollar, we must ask how an individual’s incentives to seek additional earnings are affected. When net-of-tax-and-transfer earnings are significantly diminished, producing 40 cents of spendable income for every dollar earned, how many Canadians will respond and take on additional hours?
In surveying the METRs across provinces, one arrives at the unavoidable and troubling conclusion that individuals and families with relatively modest incomes face extremely burdensome effective tax rates, often higher than those in the top-income brackets.
This is troubling because numerous international economic studies suggest that such high rates undoubtedly diminish incentives to seek additional income and, by extension, likely create barriers to upward mobility. This dynamic disproportionately affects women, especially mothers who are often the secondary earner in a family.
This is a problem with clear solutions. Low-income individuals and families facing high METRs would benefit from: • lower claw-back rates on their income-tested transfers; • higher-income thresholds before they face reductions; • an increase in the basic exemption amount on earned income, • lower statutory tax rates on employment income they earn.
All these would push down those peak METR rates. And all of those remedies mean less tax revenue or higher benefit spending by governments. And when governments are fiscally pinched, they’re tempted to push the tax burden onto other groups, with potential political costs.
Given the tradeoffs and the costs involved, high marginal effective tax rates on families with low and modest income will be a continuing challenge in Canada. We should, however, be aware of the issues and keep governments on their toes when they propose increasing benefits or tax rates without an eye on the bigger picture.
(Philip Bazel is an associate at the School of Public Policy at the University of Calgary and author of the recent Fraser Institute study Marginal Effective Tax Rates Across Provinces: High Rates on Low Income.)
GHTK was established in 2007 and is a registered Canadian Charity with the goal of decreasing the neonatal and infant mortality in developing countries. During the visits of Dr. Narendra Singh and his wife Dr. Shirley Sit to Guyana, they were deeply saddened to learn of the high percentage of neonatal deaths occurring at the Hospitals in Guyana. They saw that the Neonatal Intensive Care Units were poorly equipped and lacked life-saving equipment that is standard in NICUs in Canada.
GHTK is managed by a volunteer Board of Directors and more than 90% of funds raised are used for educational programs and equipment purchases. Administrative overhead costs are less 10% of funds raised. In 2018, the Board decided to expand their outreach in the Caribbean and the program has been warmly received in Antigua; so the name, Guyana Help the Kids, was changed Giving Health To Kids.
Dr. Singh and Dr. Sit made it their goal to help the country of Dr. Singh’s birth improve on the care and treatment of babies and children by creating the Vision of GHTK “Every Child deserves a Tomorrow.” This could only be done by working with the various government agencies in Guyana, together with the hospitals involved in providing the health care to babies.
GHTK has recruited a dedicated and compassionate Board of Directors who share the vision put forth by Dr. Singh and Dr. Sit. The major focus of GHTK has been to establish a comprehensive education program for local physicians, nurses and other allied healthcare professionals. In addition, a major goal of the Board has been to purchase specialized equipment, in order to elevate the level of neonatal care.
Since the inception of GHTK, infant mortality has been reduced by 40%. Over half of a million dollars has been raised from generous donors and sponsors. Your support is the key to the success of the GHTK. Your gifts fund life-saving equipment and technology, capital improvements and continuing education opportunities, providing dedicated hospital physicians and staff with the necessary tools to give BETTER health to kids.
For info, call 416-747-1991 or email Office@ghtk.ca
Website: www.ghtk.ca