The Impact of Converting Federal Non-Refundable Tax Credits Into Refundable Credits

Auteurs-es

  • Wayne Simpson University of Manitoba
  • Harvey Stevens Prairie Research Associates

DOI :

https://doi.org/10.11575/sppp.v8i0.42535

Résumé

With economic inequality on the rise in Canada, the federal government needs to consider innovative solutions. One possibility for improving the tax-transfer system involves refundable tax credits (RTCs). Making all tax credits refundable wouldn’t require Ottawa to introduce new tax measures; the Canadian tax system already contains a mix of RTCs and NRTCs, so the government could simply continue its practice of designing tax credit programs to be refundable. Using Statistics Canada’s Social Policy Simulation Database and Model, this paper examines the impacts and cost of converting NRTCs to RTCs, with and without an income exemption equal to 25 percent of the before-tax lowincome standard for a census family, the Census Family Low-Income Line. Under the Option Without Exemption (OW/OE), RTC recipients are taxed at a single rate of 15 percent, regardless of family size, right up to the Line. Under the Option With Exemption (OWE), RTC recipients are taxed at zero percent up to 25 percent of the Line and at a single rate of 20 percent, regardless of family size, up to 100 percent of the Line. The incremental cost of switching NRTCs to RTCs under the OW/OE is $6.6 billion, as additional benefits are provided to 6.4 million families — slightly less than 37 percent of all families. The cost of the OWE is $7.2 billion, as benefits flow to slightly more families — 6.45 million. However, the percentage of benefits reaching low-income families is much higher under the OWE (69 percent vs. 49 percent). Additionally, the OWE provides an average of nine percent more RTC benefits to low-income tax filers, making it clearly the superior option for poverty reduction. Moreover, the paper shows that alternative conversion schemes that set benefit reduction rates to differ by family size can further increase the benefits to low-income families at a lower overall cost. Such changes would elicit a labour-supply response in terms of a reduction in hours worked, and while the effect is smaller under the less expensive OW/OE, the difference between the two options is slight. This paper simulates the conversion of NRTCs to RTCs in comprehensive detail, besides providing practical advice on how such a shift would be funded. It offers valuable food for thought on an issue that is increasingly critical to Canadian society.

Références

Atkinson, Anthony B. and Morelli, Salvatore, (2014). “Chartbook of Economic Inequality,” Society for the Study of Economic Inequality (ECINEQ) Working Paper 2014-324. Also available in an online version at: http://www.chartbookofeconomicinequality.com/

Boadway, Robin, (2011). “Rethinking Tax-Transfer Policy for 21st Century Canada,” in Fred Gorbet and Andrew Sharpe (eds.) New Directions for Intelligent Government in Canada: Papers in Honour of Ian Stewart (Ottawa: Centre for the Study of Living Standards).

Boadway, Robin, (2013). Submission to the House of Commons Standing Committee on Finance, April 25.

Chandler, Vincent, (2014). “The Effectiveness and Distributional Effects of the Tax Credit for Public Transit,” Canadian Public Policy/Analyse de Politiques 40(3), 259-269.

Davidson, Justine, (2010). “Senator promotes guaranteed income model,” Whitehorse Daily Star, April 12. Accessed February 3, 2015 at: http://whitehorsestar.com/News/senator-promotes-guaranteed-income-model

Evers, Michiel, de Mooij, Ruud and van Vuuren, Daniel, (2005). “What explains the variation in estimates of labour supply elasticities?” CESifo Working Papers No. 1633, Centre for Economic Studies and Ifo Institute, University of Munich, December

Finance Canada, (2014). The Road to Balance: Creating Jobs and Opportunities: Economic Action Plan 2014 (The Budget in Brief). Ottawa: Government of Canada, February 11. Accessed at http://www.budget.gc.ca/2014/docs/bb/pdf/brief-bref-eng.pdf

Fortin, Nicole, Green, David A., Lemieux, Thomas, Milligan, Kevin and Riddell, W. Craig, (2012). “Canadian Inequality: Recent Developments and Policy Options,” Canadian Public Policy/Analyse de Politiques 38(2), 121-145.

Curry, Bill and Chase, Steven, (2014). “Harper boosts monthly child benefit, unveils income splitting plan,“ Toronto Globe and Mail published online October 30, 2014 and accessed online February 19, 2015 at http:// www.theglobeandmail.com/news/politics/harper-unveils-income-splitting-tax-cut-expands-monthly-childbenefit/article21386549/

Hum, Derek and Simpson, Wayne, (1994). “Labour Supply Estimation and Public Policy,” Journal of Economic Surveys 8(1), 57-81.

Hum, Derek and Simpson, Wayne, (2001). “A Guaranteed Annual Income? From Mincome to the Millennium,” Policy Options/Options Politiques, January-February, 78-82.

Laurin, Alexandre and Kesselman, Jonathan Rhys, (2011). “Income Splitting for Two-Parent Families: Who Gains, Who Doesn’t, and at What Cost?,” C.D. Howe Institute Commentary No. 335.

McClelland, Robert and Mok, Shannon, (2012). “A Review of Recent Research on Labor Supply Elasticities,” Congressional Budget Office Working Paper 2012-12, October.

Mintz, Jack, (2014). “17 Reasons why Canada needs simple tax reform now,” Financial Post Magazine. April 3.

Piketty, Thomas, (2014). Capital in the Twenty-First Century, Harvard University Press. Statistics Canada, (2013). SPSD/M Product Overview. Ottawa: Statistics Canada.

Téléchargements

Publié-e

2015-08-24

Numéro

Rubrique

Research Papers