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Revisiting the Conservatives’ tax cut and child benefit packages

Changing ideas about taxation have impacts that last much longer than any election cycle


 

taxes storyA few nights ago, I went on a bit of rant on Twitter about principles and impacts of different tax and benefit choices behind the planned Family Tax Cut and increases to the Universal Child Care Benefit and Child Care Expenses Deduction.  Here’s a more (I hope) articulate version, in more than 140 characters at a time.  First, a debt of thanks to Kevin Milligan for his analysis of the distribution of the Family Tax Cut and the principles that may (or may not) be behind the policy move.  Kudos also to Luke Kawa who flagged the importance of separating the tax measures from the benefit increases.  As the Parliamentary Budget Officer pointed out, the net effect of the tax changes (not the UCCB benefits) is actually a substantial increase in personal income tax revenues after the next fiscal year (the election year) onward, which is kind of a funny political strategy for a conservative government.

All changes to our personal income tax and transfer system reflect ideas about how tax revenues should be collected and to whom public benefits should be paid.  Those ideas can be explicit or implicit, but either way they matter.  Each incremental change to the system becomes part of the new normal. These changing ideas about taxation have impacts that last much longer than any election cycle. So, let’s separate the wheat from the chaff and talk about the ideas behind the changes to taxation and, separately, child benefits.

One idea is that a personal income tax system like ours, based on individual income, should be horizontally equitable.  Horizontal equity is usually thought of as ‘equal treatment of equal taxpayers’. In a tax system like ours, we generally tax individuals making the same amount of money at the same rate.  Horizontal equity solved?

I think the argument that the Family Tax Cut is really about horizontal equity implies that this principle should apply to families, not just individual taxpayers.  The argument is that it’s unfair for a two-earner family with $100,000 of total income to pay less in tax than a one-earner family household with the same income.  But this leads to all kinds of new, sticky problems. How do you define ‘family’ for tax purposes?  Why should we limit it only to couples with children who make up less than half of all families in Canada?[1] A long time ago, our federal income tax system was actually dual track.  It imposed different rates for singles without dependents compared to taxpayers supporting family members–with a very broad, inclusive definition of “family,” by the way.[2]  Also, why is the value of the Family Tax Cut the same regardless of the number of dependent children a couple has?  Arguably, a family unit of 3 isn’t equal to a family unit of 5 or 6.

If the real idea is to go back to applying the principle of horizontal equity to ‘family units’, then we better be prepared to recognize all kinds of shapes and sizes of families. That faint sound you hear now is the collective gasp in the Department of Finance at the thought of the hit to tax revenues and the complexity that would come with verifying that  seven-year-old “George” claimed as a “dependent relative” is, in fact a person and not a goldfish.

The system we have is pretty good at taxing individual incomes in a way that respects horizontal equity. An individual’s actual earnings are a lot easier and more transparent to track and tax.  It’s a lot harder to keep track of who else they live with and may, or may not, support. By demanding horizontal equity at the household level, and only for selected households, are we asking it do something it isn’t built for?

Another option would be to use the same principle behind the Child Care Expenses Deduction (CCED) for the Family Tax Cut.  That principle, as Kevin Milligan pointed out in his post, is to tax net income, after accounting for the reasonable costs incurred to earn that income.  Parents can’t go to work and leave their children alone so we allow deductions for some kinds of childcare.  When I read the literature from proponents of income-splitting and think about the wide range of couples I know with kids, I hear a lot about one spouse cutting back their hours or leaving paid work (meaning a cost in foregone income) to take on childcare and home-management, while the other spouse maybe works a little more to make ends meet. If so, then the more equitable and transparent tax recognition is probably a deduction, like the CCED, not income-splitting. Again, more gasps from Finance.

On the other hand, some of our income benefits (money paid out of consolidated public revenues to eligible people) are pretty good at ensuring horizontal equity for households.  Those benefits usually dive into details of total household income, household size, age of children, and on and on.  Ask anyone who has ever applied for social assistance, these benefits are intrusive and complicated.  When we can at least use tax data to track incomes, there are some efficiencies.

So let’s look at the Universal Child Care Benefit (UCCB), which was another part of the package. It’s a flat income benefit but taxable.  The benefit is paid out at the same dollar value as long as the number and age of the children is the same, regardless of the number of parents or incomes.  Wait, that’s not the same as ‘equal treatment of equals’ by the same standard used to defend the Family Tax Cut. Even after taxes are paid, the net value of the UCCB has all kinds of strange patterns, as The Caledon Institute argued when it was first announced. But it’s now eight years later and the UCCB has become part of the ‘new normal’ of tax and transfer systems–I told you these things tend to be resilient.

On the 20th of each month, the UCCB money is paid out to eligible families. On the exact same day, the federal government also pays out the Canada Child Tax Benefit (CCTB).  In fact, the UCCB piggybacks on the CCTB administrative system. That’s why, by the way, anyone eligible for more UCCB money as of January will have to wait until July to see that money.

Today, the CCTB actually reaches more families with kids and paid out more money ($10.6 billion last year compared to $2.7 billion for the UCCB last year).[3]  The CCTB also does ok under that old horizontal equity principle.  A household with $100,000 in income and two kids gets the same amount (about $58 a month)[4] regardless of whether the income is earned by one or two parents making $50,000 each.  The CCTB goes up as household income goes down, and it even adjusts if kids live in two houses under shared custody. Also, the CCTB isn’t taxable, which anyone who just likes paying less tax ought to prefer over a benefit that is taxable.

If horizontal equity is really the main implicit idea, then I don’t see a clear case for the Family Tax Cut or the UCCB.  If the idea is to give recognition of the costs when a spouse cuts back on work, we still have a problem. Finally, if what we really wanted to do is put more money into the hands of people with kids who need it, which is mostly what the government has been saying they wanted to do, then why didn’t they just use the best tool they already had in place?

Jennifer Robson is an Assistant Professor at Kroeger College, Carleton University. Her teaching and research are in the areas of public policy and political management.  She lives in Ottawa with her partner and three kids.


[1] 2011 Census of Canada, Statistics Canada.

[2] For example, in 1943, taxpayers could name spouses, children, siblings, grandchildren, parents and grandparents who earned less than a threshold amount as “dependents”, leading to lower, but still progressive tax rates.  By 1949, this had been replaced by a deduction for spouses and children.  That eventually became the non-refundable tax credit for a dependent spouse and the similar credit for eligible dependents.

[3] Canada Revenue Agency, Benefit Statistics, “Year to Date Totals”, July 2013 to June 2014.

[4] Based on two children where one child is under age 6.

 

 


 

Revisiting the Conservatives’ tax cut and child benefit packages

  1. The Orwellian-titled “Universal Child Care Benefit” provides child care for no one. So it doesn’t matter what horizontal test it passes. It’s still nonsense.

    Continuous tax cuts since the 1990s cost over $90-billion/yr. Canadians don’t need “tax relief”. They need benefits relief — like real universal child care, which will allow more parents to raise their living standards by working.

    Fact is the child care tax credit and UCCB baby bonus don’t come remotely close to the enormous benefit subsidized daycare spaces would provide to middle- and low-income parents — which amount to over $1000 a month. These definitely pass the horizontal test for funding. The top 20%, which makes 52% of the income, pays 60% of the taxes.

    It’s time to stop fooling around with the tax code. Canada is a laggard in public social spending. We are behind over $80-billion a year compared to the average spending of other developed countries. Small government is the problem.

    Daycare by the numbers
    http://democraticvotingcanada.blogspot.ca/2014/10/daycare-by-numbers-quebecs-progressive.html

    • If Canada is such a problem for you, move. Not every country the world over needs to match the spending of your ideal European welfare state model. Find one more to your liking.

      • Canada wasn’t a problem for me before free-market ideologues turned the economy into a train wreck. Clearly Harper is winning no popularity contest with his boutique tax cuts that primarily benefit the wealthy.

        Fact is during the post-war Keynesian-era (1945-1980) real median earnings kept track with GDP-per-capita. Since 1980 they have actually FALLEN. Men’s incomes fell from $43k to $37k. Women have not made significant gains: from $20k to $24k.

        It’s absurd to have an economy where only the rich benefit from economic and productivity growth. That is not a democracy. It’s a plutocracy. And the damage this inequality has caused to the economy is not over yet.

        The Great Moderation brought back boom-to-bust business cycles. First the dot com bubble. Then the housing/derivatives collapse. Now we are still stuck in the midst of the Great Recession with near-zero interest rates for 6 years and counting. All this trickle-down helicopter money has amounted to nothing. When the economy finally recovers, (who knows when that will happen,) it will collapse again because nothing has changed. Conditions have only worsened.

        The only way we can return to prosperity is to use the centrist policies of the successful Keynesian era that created modern living standards which were unprecedented in history (what’s left of them.)

        We must reverse pointless tax cuts for the rich, and invest these scare economic resources in people and green infrastructure. A strong social safety net will make workers more productive and put more money in people’s pockets boosting the economy.

        We tried the right-wing way and failed, colossally. Time to bring back low inequality, economic stability and strong economic and productivity growth from which all segments of society get their fair share.

        • UNICEF says child poverty has fallen in Canada since Harper got in. Name the last time poverty has actually been reduced during a severe global recession. Keynes would be impressed.

          http://www.cbc.ca/news/politics/canada-s-child-poverty-rate-down-despite-recession-unicef-finds-1.2815426

          I’m not surprised you never saw this article. The CBC seemed almost embarrassed to run it, and it only appeared on their main news site for a single afternoon.

          • UNICEF says Canada ranks #24 in child poverty. Nothing to brag about, for sure. Canada wasn’t hit as hard as other countries from the Great Recession thanks to Liberal banking regulation (that prevented a derivatives meltdown here) and a resource boom (now in decline.)

            Of course Canada has yet to pay for Harper’s mortgage and CMHC deregulation that created an enormous housing bubble. We are now hitting Japan levels of real housing prices – over 200%. (When Japan’s housing bubble deflated in a 15-year bear market that caused a 20 year economic slump they have still to extricate themselves from.)

            Worthwhile Canadian Comparison (dig at Stephen Gordon’s neoliberal blog?)
            http://krugman.blogs.nytimes.com/2013/06/15/worthwhile-canadian-comparison/

  2. That faint sound you hear now is the collective gasp in the Department of Finance at the thought of the hit to tax revenues and the complexity that would come with verifying that seven-year-old “George” claimed as a “dependent relative” is, in fact a person and not a goldfish.

    Cute turn of phrase, but Garth Turner you are not. Income splitting is no more likely to be given to a couple claiming their goldfish as a dependent child than the CCTB is now. Since CRA already feels it is capable of separating the children from the goldfish where the CCTB, UCCB, and various other family benfits & credits are concerned, this is a non-issue. If you are arguing that income splitting should be available to all types of families, I agree completely. Any household should be able to distribute income among family members to gain tax efficiency, not just those with kids under 18. Certainly single parents should be allowed to split income with one child, as they are allowed to claim the spousal credit on the line that says “equivalent to spouse amount” on the T1.

    • These neo-con families values are getting us absolutely nowhere. It makes no sense to give big tax breaks to rich men with trophy wives while dual-income families struggling with falling incomes and rising debt loads have to fork over $1000/month per child for childcare.

      The smart investment is to provide low-cost childcare for low- and middle-income families so they can pay down their debts and save for their retirements and children’s education. By putting more money in people’s pockets, this will boost the economy as people spend, save and invest more. Economics 101.

  3. This is primarily a neatly disguised tax break for the rich – lets move on now.

    • It’s been explained very carefully by John Geddes, Andrew Coyne and others that it nothing of the sort, but don’t let little details like that get in the way of your usual knee-jerk reactions. They are reflexive after all – you can hardly be expected to think before posting.

      • NO, the CDN Tax system is a convoluted overly-complex, designed on purpose to … mess.
        Just make it a percentage basis, simple, the more you make, the more you pay as per percentage, with no loop holes for the rich, or the corps,…, or anyone.
        AND, then there’ll be NO knee-jerks, just jerks like Ragers’.

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