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Report on Business Low, middle-income Canadians face high effective tax rates: Fraser Institute report

By one key metric, Canadian families making $30,000 to $60,000 a year pay a higher effective tax rate than higher-earning families, and governments should consider lowering income taxes for people with modest incomes, according to a new report from the Fraser Institute.

The marginal effective tax rate, the metric the report focuses on, takes into account the income tax someone pays and the government benefits they lose as they make more money. Essentially, it’s how much of an additional dollar earned that a person keeps, after some of it is taken away through income tax or used to fill the gap left by benefits the person must now forgo.

The public policy think tank found people and families with low-to-moderate incomes would get to keep only half or less than half of an extra $100 they earned, depending on the province they live in.

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“High marginal effective tax rates reduce the gains some families achieve by working more, which can discourage people from working more and increase reliance on government benefits,” Finn Poschmann, resident scholar at the Fraser Institute, said in a statement with the report on Tuesday.

Mr. Poschmann says he believes the relatively high marginal effective tax rate could affect decisions made by the secondary earner in a family such as whether to pick up an extra shift – especially when factoring in inherent costs including finding child care.

The report suggested solutions such as reducing the income-tax rate for people at the lower end of the income scale; allowing people to earn more money before they have to start paying income tax; and slowing the rate at which things such as the Canada Child Benefit are reduced as people earn more money.

But other economists don’t think the Fraser Institute’s figures should be cause for alarm.

Governments need to choose what types of benefits they dole out, said Trevor Tombe, a professor at the University of Calgary. Means-tested benefits such as the Canada Child Benefit are scaled back the more someone earns, and are therefore cheaper to administer – but they’ll drive up the marginal effective tax rate.

“So if you were to shift into a system where you had no clawbacks, then it would cost the government quite a bit more and that would require tax levels being quite a bit higher,” Prof. Tombe said.

Another way to bring down marginal tax rates would be to give fewer benefits to poor families, which also wouldn’t be a wise move for a government with a goal of ameliorating child poverty, said Michael Smart, an economics professor at the University of Toronto.

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The current federal government increased the Canada Child Benefit, and an average two-income household with two children now keeps nearly 85 per cent of their gross income after that is factored in, according to Pierre-Olivier Herbert, a spokesperson for the Ministry of Finance.

At the end of the day, some advocates say there are better ways to help working families than lowering income taxes or shifting the rates at which benefits are clawed back.

Raising wages, addressing the housing affordability crisis in certain Canadian cities and implementing a universal, affordable childcare system should all be priorities, according to Pam Frache, a co-ordinator with Fight for $15 and Fairness, a lobby group.

“Those things would make a huge difference in raising the standard of living for all of us,” she said.

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