Abstract
Low-income Canadian families with children encounter high “all-inclusive” tax rates that could discourage parents from working more or entering the workforce, argues a new C.D. Howe Institute report. In “The Paycheck Blues: Why Extra Work is often Not Worth the Effort for Lower-income Families,” author Alexandre Laurin finds that parents with children may lose a significant chunk of their take-home pay through taxes and reduced fiscal benefits.
Highlights
As families earn more income, they owe more tax and they are entitled to lower government payments for fiscal benefit programs
Since 2016, the new Quebec tax shield has been partly compensating workers for the loss of the work premium and the tax credit for childcare expenses – but only in the first year after they take on more work. (iii) Introduce a refundable credit at the federal level for childcare costs, with very generous rates for lower-earning families
Notes: Includes Ontario Childcare Access and Relief from Expenses tax credit introduced in 2019 Ontario budget
Summary
As families earn more income, they owe more tax and they are entitled to lower government payments for fiscal benefit programs. To determine the tax system’s full effect on the family’s financial gain from work, one must take into account the combined effect of both taxes paid and fiscal benefits reduced This E-Brief presents various estimates of effective tax rates on personal earnings for families with children.. Women and mothers, most often the secondary earner and lower-skilled worker in families, are much more responsive to wage and tax-rate variations These findings mean that a high METR or PTR for a child-caring spouse is likely to affect the incentive to work longer hours, to seek part-time work or to re-enter the workforce. Because taxes and benefit programs can interact to create extraordinarily high effective tax rates, governments need to be mindful not to discourage work, especially among mothers and secondary earners in a family This is especially true of families with children eligible for generous child-related fiscal benefits. Adding median paid childcare expenses yields participation tax rates generally ranging from 50 percent to more than 80 percent nationally
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