How expanding tax credits would help to lower our country’s welfare wall

Andrew Jackson is adjunct research professor in the Institute of Political Economy at Carleton University, and senior policy adviser to the Broadbent Institute.

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 the working poor, 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 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 per cent 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 that 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, making the average benefit less than $1,000 a year. Thus, the WITB is a small source of income for low-income, working-age households, amounting to only about 2 per cent of total income supports for this part of the population.

Following a recently announced increase of $250-million a year from 2019 to cushion the impact of increased Canada Pension Plan (CPP) 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 per cent 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 per cent 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 that 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 Employment Insurance (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 as then-finance minister Jim Flaherty said in introducing the program in 2007, a major goal was to promote transitions from welfare to work. But the so-called "welfare wall" is still intact, and only about 10 per cent 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 a month. If that person finds a low-wage, temporary job, earnings above $200 in the month up to about $1,500 a month are effectively taxed back at a rate of 50 per cent through a lower benefit. And this does not take into account deductions from a paycheque such as EI 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 per cent even at earnings levels that fall far short of the poverty line. Note that the 50-per-cent clawback on social assistance plus the 14-per-cent phase-out of the WITB result in at least a 64-per-cent 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 per cent 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 such as the Guaranteed Income Supplement for seniors in which there is automatic enrolment and monthly payment of benefits.

As with persons who work while on an active EI 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.