The Broadbent Blog


Expand Tax Credits to Lower the Welfare Wall

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In last month's Fall Economic Statement, the federal government promised to enhance the Working Income Tax Benefit (WITB) through additional annual funding of $500 Million starting in 2019. Canadians were invited to provide input on how the additional funding should be used, with the details to be announced in the 2018 federal budget.

The WITB is a refundable tax credit paid to single people and families with low earnings and is intended to raise the incomes of the working poor and to provide an incentive to move from welfare to work.

But, while the new funding is welcome, the WITB is relatively ineffective in raising the incomes of working poor single persons and families, and does not greatly help social assistance recipients transition to employment.

It should be reformed so as to provide a supplement to wages in real time, should provide a higher maximum benefit, and should be phased out much more slowly as employment income rises so as to reduce very high marginal tax rates for the working poor.

In conjunction with higher minimum wages, an enhanced WITB could serve as a meaningful response to the rise of precarious and low paid jobs. Currently, some 70% of working-age Canadians living in poverty have some (albeit often very little) employment income, and about one in five working Canadians are employed in insecure and/or low paid jobs which fail to provide an adequate income for those who do not live with higher earners.

In 2016 the WITB paid out $1.1 billion in refundable tax credits to 1.4 million Canadians. The average benefit was thus less than $1,000 per year. The WITB is a very small source of income for low income, working age households, amounting to only about 2% of total income supports for this part of the population.

Following a recently announced increase of $250 Million per year from 2019 to cushion the impact of increased Canada Pension Plan premiums, the WITB will provide a maximum annual benefit to singles of $1,192. Benefits are phased in above earnings of $3,000, and are phased out at a rate of 14% on incomes of more than $12,000. No benefit is paid once net income rises above about $21,000.

For families (mainly single parents with children) the maximum benefit is $2,165, phased out at the same rate of 14% as incomes rise above $17,000. (Note that program parameters differ somewhat between the provinces,)

For both singles and families, benefits are phased out at levels of income which fall well below the poverty line. A single person is, using Statistics Canada's Low Income After Tax measure for 2015, considered to be living in low income if she has an after tax income of less than $22,352 ($31,611 for a two person household. )

The WITB provides almost no benefit at all to low income, full time, full year workers, even those earning the minimum wage, and is most likely to be received by social assistance and EI recipients who  earn modest amounts in part-time and/or temporary jobs. Remarkably little data are available, but take-up seems to be mainly among younger singles, and single parents.

The WITB interacts with social assistance, and then Finance Minister James Flaherty said in introducing the program in 2007 that a major goal was to promote transitions from welfare to work. But the so-called “welfare wall” is still intact, and only about 10% of social recipients also have employment income.

Consider a so-called “employable” single person in Ontario receiving a meagre social assistance benefit of about $700 per month. If that person finds a low wage, temporary job, earnings above $200 in the month up to about $1500 per  month are effectively taxed back at a rate of 50% through a lower benefit. And this does not take into account deductions from a pay cheque such as Employment Insurance and CPP premiums and income tax, as well as the possible loss of income-tested health, housing and child care benefits.

Social policy experts such as John Stapleton and Richard Shillington have shown that social assistance recipients can face marginal tax back rates of more than 100% even at earnings levels which fall far short of the poverty line. Note that the 50% clawback on social assistance plus the 14% phase out of the WITB result in at least a 64% reduction of net earnings for persons on low wages trying to leave social assistance.

It is perverse that we allow the very rich to pay low effective tax rates by using various shelters and loopholes, while we impose extremely high marginal tax rates on the working poor.

It follows that the WITB benefit has to be much higher, and to phase-out much more slowly, if it is to alleviate poverty and meaningfully promote transitions from welfare to work.

Another key problem with the WITB is that benefits are largely paid out after the fact, based upon the prior year's taxable income. A person has to claim benefits on her or his tax form, and can only then receive a maximum of 50% of the WITB benefit over the following year as quarterly payments.  Few people are even aware of this provision. 

Take-up is much lower than for programs like the Guaranteed Income Supplement for seniors where there is automatic enrollment and monthly payment of benefits.

As with persons who work while on an active Employment Insurance claim, there should be a monthly WITB benefit linked to real time earnings. This could be delivered in the form of an increased social assistance payment for those with a current claim.

The WITB could and should be an important part of Canada's social policy tool kit, working with higher minimum wages to help the working poor. But much more needs to be done.

 

Andrew Jackson is Adjunct Research Professor in the Institute of Political Economy at Carleton University, and senior policy adviser to the Broadbent Institute.

Image via Unsplash/Rémi Walle