A measure that has not garnered much attention yet in the federal government’s economic update is the expansion of the Working Income Tax Benefit program. This is unfortunate, because if there’s a way to do social programs right, this is probably it. This program is designed to increase the value of work to people currently on government assistance by giving an income boost to individuals and families with low incomes. What’s so great about this is that it does not increase the fiscal burden, but actually reduces it, while being based on particularly sound economics.
In fact, American experience with this kind of policy has yielded impressive results in terms of reducing the share of the population using social programs by increasing participation in the workforce. Over a period of less than 15 years, the proportion of the population receiving social assistance fell by more than 70 per cent, largely as a result of these programs.
Starting in the early 1990s, several U.S. states began reforming their social assistance systems, and this was followed by a 1996 federal reform signed into law by President Bill Clinton. These changes aimed to make social assistance less attractive, and work relatively more attractive, for the purpose of guiding existing social assistance recipients toward the job market while reducing the number of new recipients.
Reforms along similar lines were also introduced elsewhere in many OECD countries during the 1990s, moving from unconditional assistance to conditional aid leading eventually to self-sufficiency. These reforms included various restrictions and requirements, and applied to limited groups of recipients.
Like those reforms, the goal of expanding Canada’s Working Income Tax Benefit program is to enhance the value of work and to encourage recipients to increase their work effort. To do this, paid work must become more rewarding than the alternative of simply receiving a cheque.
Current plans, before this latest announcement, were for Canadians to have about 26 per cent of their tax burden from their work income reimbursed as soon as they earn at least $3,000 starting in 2019. As their income increases, this tax benefit will be gradually phased out, until it reaches a maximum income that varies from province to province. The government has yet to reveal the details of how this program will be affected by the additional $500 million it has just announced.
As a general rule, the more labour income is taxed, the less people are encouraged to work. But social program recipients face even more extreme disincentives to work. As they increase their work income, they begin to contribute to pension plans, employment insurance, and other withholdings and contributions. And most importantly, for every additional dollar earned, they see their welfare cheques reduced, sometimes almost dollar for dollar. This creates the so-called poverty trap, in which, ironically, it might not be in the immediate financial interest of recipients to better their situation through work.
Programs like the Working Income Tax Benefit provide a supplement to low-income workers to improve their financial situation and make work more attractive, and help claimants to access the labour market, where earnings are generally higher than welfare benefits. Where such measures have been implemented, they have reduced poverty.
In comparison with the $15 minimum wage, whose proponents mistakenly suggest it can reduce poverty, the economics behind incentives to work are proven, well researched, and generally uncontroversial. Increasing the funding of the Working Income Tax Benefit does not place a disproportionate burden on employers, and does not run the risk of increasing unemployment among those it purports to help.
Not only are the economics behind this reform sound, but it is a clear example of solving a public policy problem through more economic freedom, rather than attempting to do so through ever more government intervention. Instead of increasing spending on social programs, the government is essentially doing what it has to do to tax these people less than it used to in the past.
We critics of the government’s intervention in the economy are quick to assign blame when it errs with misguided policies, but we should also cheer when it does things right. This is one of those occasions.
Michel Kelly-Gagnon is President and CEO of the Montreal Economic Institute. The views reflected in this op-ed are his own.
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