The Fraser Institute

The Fraser Institute

March 19, 2013 06:32 ET

The Fraser Institute: Extending Low-Income Tax Credits to Middle Earners a Risky Precedent for Canada

VANCOUVER, BRITISH COLUMBIA--(Marketwire - March 19, 2013) - Canada risks following the U.S. example of expanding tax credits originally targeted for low-income individuals and households to a broad segment of the population, concludes a new report from the Fraser Institute, an independent, non-partisan Canadian public policy think-tank.

"We're starting to see the expansion of key programs like the Working Income Tax Benefit. If that trend continues like it has in the U.S., a larger and larger share of the population will be exempted from income and payroll taxes, leaving the rest of society to pay a bigger share," said Jason Clemens, Fraser Institute executive vice-president and co-author of Tax Payers and Tax Takers: Is the Trend of Tax Progressivity in the U.S. Emerging in Canada?

"In order for citizens and households to be mindful of government costs, they must face some portion of the cost. When a small minority of voters shoulders the bulk of the tax burden, it's easy for everyone else to approve of any and all government programs and spending, whether they provide great benefits or not, and no matter what the cost."

Tax Payers and Tax Takers examines specific Canadian and American tax policies that have broadened the eligibility for low-income tax benefits.

Distribution of tax burden

For 2011, the U.S. Tax Policy Center estimates that 46 per cent of Americans had no income tax liability compared to 54 per cent with significant tax liability. In Canada, the percentage of tax filers who face no income tax liability has increased to 38 per cent in 2010 from 32 per cent in 2000.

The Tax Policy Center also estimates that more than one in four (28 per cent) of U.S. tax filers have no tax liability for either income or payroll taxes. These tax filers receive enough in refundable tax credits to not only eliminate their income taxes but more than offset the full value of their payroll taxes.

"The explosion in eligibility for federal tax credits in the U.S., particularly the Earned Income Tax Credit and the Child Tax Credit, has increasingly sheltered middle-income families from income and payroll taxes," Clemens said.

"This is a warning for Canada, which implemented two similar tax credit programs and has already expanded both of them."

A key driver of the increased percentage of Canadians tax-filers with no income tax liability is programs like the Working Income Tax Benefit (WITB) and the Child Tax Credit (CTC), both introduced in 2007. These two programs are very similar to parallel programs in the U.S.

The Government of Canada increased spending on WITB to $1.025 billion in 2009 from $480 million in 2008. The cost of Canada's Child Tax Credit is expected to exceed $1.5 billion in 2011.

"By aggressively expanding these tax credits like the United States has done, Canada will increasingly insulate middle-income people from contributing even nominally to society's overall tax bill," Clemens said.

"Democracy can't function properly when a sizeable majority of tax filers are exempt from the cost of their decisions because they pay little or no direct taxes. The only way to encourage Canadians to consider the economic costs and benefits of government programs is to ensure that most Canadians, not just a select few, are responsible for paying the price of government."

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The Fraser Institute is an independent Canadian public policy research and educational organization with offices in Vancouver, Calgary, Toronto, and Montreal and ties to a global network of 86 think-tanks. Its mission is to measure, study, and communicate the impact of competitive markets and government intervention on the welfare of individuals. To protect the Institute's independence, it does not accept grants from governments or contracts for research. Visit

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