Income tax changes don't help lower-income families rise up, say policy experts

Despite an increase in government transfers, the ones who most need help may be getting hurt

Income tax changes don't help lower-income families rise up, say policy experts
While tax cuts and government transfers through benefits might sound beneficial for lower-income households, these policies might not be delivering the impact they intend.

In a commentary on the government’s alterations to federal personal income tax rates and elimination of numerous tax credits, two analysts from the Frasier Institute said that “many families who can least afford to pay” are being charged higher income taxes.

Focusing on taxpaying families with children in the bottom 20% of income earners, defined as those with family income below $66,448, the analysts said that such households don’t benefit from a signature policy that knocks the second-lowest federal tax rate down from 22% to 20.5%.

“[T]his rate reduction only applies to individual incomes between $45,916 and $91,831, so few families in the bottom 20 per cent received a meaningful tax cut,” said Charles Lammam and Hugh MacIntyre, co-authors of a recent Fraser Institute study, in a think piece for the Financial Post.

They added that since the Trudeau government took away numerous tax credits, including those for income-splitting among couples, children’s fitness, public transit, education, and textbooks, the income-tax burden on many such households has increased. “[O]nce all the major tax changes are accounted for, 61 per cent (or nearly two-thirds) of the bottom 20 per cent of taxpaying families with children now pay higher income taxes — $269 more, on average,” they said.

While some have pointed out that increases in the Canada Child Benefit are enough to make up for the increased burden, the authors argued that transfers make families more reliant on government — a totally different response from offering tax cuts to those who work hard.

“Perversely, if families in the bottom 20% earn more income, they will lose part of their CCB transfer because its value declines as family income rises,” they said. “In other words, not only has the federal government increased taxes on the bottom 20% of families with children, but it has also created circumstances where families who succeed and begin to progress get penalized through reduced CCB benefits.”

Related stories:
Higher federal taxes hurt middle-class families – study
Canada’s wealthy are paying enough tax says study