Magazine article Inroads: A Journal of Opinion

Poor Families with Kids: What's to Be Done?

Magazine article Inroads: A Journal of Opinion

Poor Families with Kids: What's to Be Done?

Article excerpt

John Richards is an editor of Inroads. For the last several years he has been co-editing, with Bill Watson of McGill University, a major series on social policy for the C.D. Howe Institute.

Operating in pre-electoral mode, the Liberals announced in the 1997 federal budget their intention to enrich the "platform" of tax benefits available for families with children. The provinces can now build on this platform additional anti-poverty programs reflecting their respective strategies. As an aside, this is a nice example of federalism functioning as it should. Ottawa is restricting its intervention to what it can do well. It is providing a relatively simple rules-based transfer of money, and leaving to the provinces the more administratively complex social policy additions to this platform. (1)

Some provinces--most notably British Columbia--favour the idea of incrementally building a generous guaranteed annual income for all families with children. Other provinces--including New Brunswick, Quebec, Saskatchewan and Alberta--prefer instead introduction of earnings supplements. Unambiguously, I think the second group is right and, in this article, I attempt to explain why.

What are guaranteed annual incomes and earnings supplements?

In the 1960s and 1970s, the terms "guaranteed annual income" (GAI) and "negative income tax" (NIT) were bandied about interchangeably in North American social policy debates. Proponents included a wide range of people--extending from advocates for the poor through to Chicago economists like Milton Friedman. In essence, the government would provide every person a guaranteed floor income sufficient to lift him/her and any dependents above poverty. Above some threshold of earnings, this supplemental income is taxed back.

By contrast, earnings supplements render employment more financially attractive by augmenting earnings, at a predetermined percentage, over a phase-in range of low earnings. By construction there is no income transfer without earnings. The maximum transfer occurs at the upper limit of earnings eligible for supplement. As with the GAI/NIT, this supplemental income is taxed back beyond some threshold earnings level.

Academics and policy analysts have debated earnings supplements for many decades, but only recently have they become a prominent component of social policy. The United States introduced an earnings supplement (the Earned Income Tax Credit) and has greatly expanded it in recent years. Ottawa introduced a small earnings supplement (the Working Income Supplement) in 1993, at the time of the overhaul of the child tax benefit. To date, Quebec is the province that has experimented most ambitiously with earnings supplements (the Parental Wage Assistance).

To give readers a more precise feel for how earnings supplements work, let me sketch one proposal being considered in Saskatchewan. The provincial government would pay a supplement of 25-35 percent (varying by number of children) over earnings of $0-$12 000. Above this phase-in range, the benefit would be taxed back at 25cents per dollar of earnings. Furthermore, so that it "feels" like earnings to the recipient, the province wants a quick-response administrative system that can pay supplements within 30 days of someone receiving the eligible earnings.

Keep in mind that roughly half of all single parents receive some form of social assistance during any year. Accordingly, it is impossible to consider the financial position of poor families with children independently of provincial welfare programs. Now, the purpose of welfare programs is to target funds to the "truly poor." Targeting means that welfare payments must fall sharply as payments rise. Typically, provinces reduce welfare payments by 80cents or more for every dollar earned. This means that parents on welfare face a prohibitively high marginal taxback rate on earned income. This 80-percent tax rate also applies to financial support from the non-custodial parent, and acts as a major disincentive to pursuing such income. …

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