Middle-aged single parents and recent immigrants to Canada are taxed harder for extra income – Vancouver Island Free Daily
A new study from the Department of Finance suggests that single parents, low-income households and recent immigrants are more likely to lose more for extra income than most other groups of workers.
Workers who live in Quebec and those aged 35 to 44 are also more likely to lose additional income by working more hours or getting a better paying job.
In some cases, federal analysis found that these groups of workers were more likely to see 50% or more of their earnings offset by higher taxes, benefit clawbacks, or a combination of the two.
Women were more likely than men to lose 60% or more of their extra income, which the recently released analysis attributes to their slightly greater reliance on federal handouts.
Katherine Scott, senior economist at the Canadian Center for Policy Alternatives, says the study lends credence to calls from anti-poverty advocates and businesses for a thorough review of the tax system.
She said a review is needed because the tax system was designed in the past and does not fully take into account the economy as it is currently structured, which creates difficult choices to work more, but does not not earn much more income.
“That’s how the system works. You’re caught against the rock and in a hard place,” Scott said.
On average, workers lost $341 for every $1,000 increase in earnings, according to the 2017 data the paper is based on.
Of that amount, about $146 was related to higher federal income tax payments, $23 to lower federal benefits like the income-tested Canada Child Benefit and $45 to payroll taxes.
The rest was a combination of provincial taxes and benefits.
Those hardest hit are those earning between $24,739 and $33,724, who, on average, lost about $413 for every $1,000 in additional income. This average was just above the loss for the top 10% earners.
The study says the proportion of low-income workers who lost 50% or more of their extra earnings was double the proportion of workers in the highest income bracket in the country.
Not being much better off or financially coping after an increase in income could make workers think twice about taking more hours or could lead others to stay out of the workforce altogether.
A large part of the population facing the possibility of losing half or more of their additional income could also be “a barrier to the success of policies aimed at increasing labor supply”, writes the Ministry of Finance in the study.
Understanding how the interplay of higher taxes and lower benefits affects workers’ decisions has been the goal of bureaucrats for years to reduce disincentives to work.
In theory, these “effective marginal tax rates,” as they are called, can show policymakers a path to getting people to work harder, but that doesn’t necessarily translate to actual results, said Garima Talwar Kapoor. , policy and research director at Maytree, an anti-poverty think tank.
“Decision makers want to think people think about these things, but that’s actually not how people make life decisions,” she said. “There are many other factors.”
She pointed to declines in the number of women working during the pandemic that were often linked to the availability of childcare, rather than whether working more would cause them to lose child benefits.
That’s why Talwar Kapoor said policymakers should look for ways to help low-income workers, in particular, maintain their benefits while strengthening their attachment to the labor market.
—Jordan Press, The Canadian Press