Kevin Milligan is Associate Professor of Economics at the University of British Columbia
The 2011 budget delivered by Finance Minister Jim Flaherty on Tuesday contained a $300-million increase to the Guaranteed Income Supplement. Even if this particular budget is never implemented, the GIS seems likely to be in the election platform of some parties. If $300-million is on the table for the GIS, is the proposed increase the best way to spend it?
As I detailed earlier on Economy Lab, the GIS is a benefit paid to about one third of Canadian seniors. It is clawed back by 50 cents for every dollar of income (excluding $3,500 of earnings and Old Age Security/GIS/Allowance benefits).
The proposed increase offers a $600 supplement to those single seniors with incomes under $2,000. For couples, the increase is $840 for those with pooled incomes under $4,000. Above those income thresholds, this extra supplement is clawed back at 25 cents on the dollar. This is on top of the 50 cent clawback of the main GIS benefit. This means that elderly Canadians will face an effective 75 per cent tax rate on income received in this range. Tax rates of that magnitude can seriously distort labour market and savings decisions, as I have discussed in my research with Tammy Schirle.
The $300-million GIS increase in this budget reinforces these existing distortions. A smarter GIS reform could use the same $300-million to improve the incentives as well as helping lower income senior Canadians.
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