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Stabile and Jones

The truth about Canada’s low-income benefits: They work Add to ...

Mark Stabile is the former Director of School of Public Policy, a Professor at the Rotman School and a fellow at the Martin Prosperity Institute, all at the University of Toronto; Lauren Jones is a post-doctoral fellow at the Martin Prosperity Institute, University of Toronto

Child poverty and inequality continues to be an important problem in the industrialized world. To help combat this, many industrialized countries use income transfers administered through the tax system, which aim to reduce poverty and inequality, and improve social mobility for children. In Canada the Canada Child Tax Benefit (CCTB) and National Child Benefit (NCB) are our main transfer programs. In the United States, it is the Earned Income Tax Credit. In the U.K., it is the child tax credit. In all cases, these programs help children do better in school and have better health outcomes. At that same time they directly reduce inequality and poverty by using general taxes, which are larger for the rich than the poor in Canada, to transfer money directly to people at the lower end of the income distribution.

But how do families actually use this money to help their children? On the one hand families may use the income to purchase more goods and services directly needed to improve educational outcomes, like spending on schools or learning supplies. Targeted spending like this could lead to improvements in school. On the other hand, families may spend the money on a bunch of needed basics like food and transportation. While these items are not directly related to education, the money could reduce the overall stress level in the family, leading to an improved home and learning environments and hence, improved education results for kids.

There has been controversy over whether families can be trusted to use transfer income to the benefit of children. Some have argued that providing families with unconditional cash transfers will cause them to waste the money on beer and popcorn, or other detrimental purchases. Recently, the debate has centered on tax credits, like the child fitness tax credit, and whether such targeted credits are a better way to ensure money is being spent appropriately.

In recent research with Kevin Milligan, we investigated how families who receive child benefits in Canada actually spend the next dollar of benefit income. Our results reveal some interesting patterns.

First, families at the lowest part of the income distribution (in our work, the bottom 25th percentiles) are much more likely to spend the money than families higher up in the income distribution. Among these families, more of the money is being put back into the economy. Second, it appears that the money is spent very wisely. Low- income families spend more on education, including more on tuition and computer equipment. These appear to be direct inputs into improving educational outcomes for their children.

They also spend more on some of life’s basic needs. They spend more on food, child-care, transportation and recreation. While we can’t measure stress levels in the household, it seems very plausible that help with these basic needs reduces stress and improves the environment for children and parents alike.

We also find surprising results when we look at so-called risky spending categories. We find large decreases in the money spent on alcohol and tobacco. It turns out that we are not the only ones that have found this. Evidence from the U.S. shows that maternal “risky” behavior like smoking declines expectant mothers get more benefit income. It seems that if we can ease financial hardship with transfer income, parents may feel less need or have less time to drink and smoke.

Over all, we’re starting to get a full picture of the effects of Canada’s National Child Benefit. It improves the lives of children, an effect that we can actually measure in terms of better school performance and improved health. It is being spent wisely by parents on both necessities for living and direct investments in education. It results in less drinking in smoking, not more. And it directly improves both poverty and inequality by transferring money from people who have more to those who have less. Not a bad combination for a single program.

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