Modest-Income Families Burdened by High Effective Tax Rates: C.D. Howe Institute



    TORONTO, March 3 /CNW/ - While recent tax relief initiatives on the part
of the federal and some provincial governments have been beneficial for Canada
overall, they were accompanied by measures that had a perverse effect for many
families - raising rather than lowering the effective tax rate on their
incremental income, says a study by the C.D. Howe Institute.
    In the study, "Still High: Marginal Effective Tax Rates on Low-Income
Families," Finn Poschmann, Director of Research at the Institute, says that
this rise in effective tax rates followed from the growth of income-tested
family benefits - transfers from governments to individuals - through
overlapping benefit plans introduced by Ottawa and the provinces. He notes
that clawbacks and benefit reductions built into these programs' design take
effect as family income increases, combining with other tax levies to create
very high Marginal Effective Tax Rates (METRs) for low- and middle-income
earners, on each additional dollar they earn. The result is low or even
negative financial returns to taking on additional work, or for leaving social
assistance to take on a job.
    There are no easy solutions, says Poschmann. Lowering clawback rates can
be extremely costly, and the alternative, reducing benefits, is politically
unattractive. Likely routes to improvement include better federal and
provincial policy cooperation, a better governmental understanding of the
costs of taxation, and political willingness to devote resources to the
problem. Doing so could form part of a long-term poverty reduction agenda.
    For the study go to: http://www.cdhowe.org/pdf/backgrounder_113.pdf.





For further information:

For further information: Finn Poschmann, Director of Research, C.D. Howe
Institute, (416) 865-1904, Email: cdhowe@cdhowe.org


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