Meredith Boessenkool & Phillips

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Ken

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Per-child tax deduction would be fairer: The bias shown by the federal taxation system in favour of two-income families over single-income families means the government believes some children are worth more than others. Kenneth Boessenkool and James Davies argue that it’s time to return fairness to families.

Are some families’ kids worth more than others’ kids? An innocuous question with, for most of us, an obvious answer. Yet if he were asked it in the House of Commons, Finance Minister Paul Martin might sense a setup and sidestep it. On the assumption that what you do means more than what you say, his instincts would be sound: the earnings status and income level of parents produce enormous differences in the amount Ottawa allows families with children to exempt from tax. 

This is a good basis for comparison since parents have an obligation to care for their children. The minimum money needed for this purpose should be excluded from tax for all families. Currently it is not. 

Consider two families, one with two income earners and the other with one, and both having two children aged three and five. 

Dual-earner families have high incomes: three-quarters of the top 40 per cent of families ranked by income, but only a quarter of the bottom 20 per cent, are dual earners, and their average family income is $71,100. With this average, they could exempt $14,000 from tax as a result of the child-care deduction and approximately $500 due to the refundable child tax benefit (the value of the child benefit received divided by the couple’s marginal tax rate) for a total of $14,500. 

Most families with a single breadwinner, on the other hand, earn low incomes — there are twice as many of them in the bottom 40 per cent as in the top 40 per cent of families ranked by income, and their average income is $52,500. At that level, they can exempt about $1,000 from tax due to the child tax benefit, or $13,500 less than the average, higher-earning, dual-income family can exempt. 

Statistics Canada’s large-city “low income cut-off” (LICO) for a family of four is $32,000. How do these two families’ tax burdens compare at that level? 

The dual-earner family (with two equal incomes) would be able to exempt about $2,200 as a result of the child tax benefit, $150 from the child portion of the refundable goods and services tax (GST) credit, and up to $14,000 for child-care expenses. As the family is unlikely to spend this much on child care, a more realistic amount would be half that, or $7,000. 

Thus, the family’s total amount of exempt income comes to $9,350. 

The single-earner family would be able to exempt about $2,100 as a result of the refundable child tax benefit — lower than for the dual-earner family because the taxback on federal refundable credits is based on net (after the child-care expense deduction) rather than gross income. The family receives no GST credit for the same reason. The shortfall for the single-earner family comes to $7,250. 

Ottawa does, then, seem to value some children more than others. A critic of this interpretation might point out that most of the difference is due to child care, which should be viewed as a cost of earning income rather than as evidence of Ottawa’s bias in favour of certain kinds of families. Our rejoinder would be merely to ask whether the disparities between single- and dual-earner families with children need to be so large. Even without child care, kids create big bills, a fact Ottawa ignores. 

What if Ottawa were to introduce a $2,000 per child deduction and reduce the maximum child-care deduction by the same amount? These changes would cost the federal treasury about $3 billion. At the middle to upper end of the family-income spectrum, this would reduce the discrepancy between single- and dual-earner families by $4,000. Dual-earner families would see no change — the reduction in child care expense deductions would be offset by the new deductions and single-earner families would exempt two per-child deduction amounts. 

Nearly all the families at the lower end of the family income spectrum would receive an additional $2,000 in tax-free income per child. Our dual-earner family at the LICO level would be unaffected by changes to the child-care deduction since it does not claim the maximum; it would therefore get $4,000 in additional tax-free income. Low-income single-earner families would get a $2,000 deduction for each child. 

This proposal would accomplish at least two things. First, for families with average or higher incomes, the discrepancy in tax-exempt income between single- and dual-earner families with children would fall. Second, it would recognize that the presence of every child should cause the taxable income of the parents to fall by a basic amount — an amount that would not differ across families. 

Are some families’ kids worth more than others’ kids? A new per-child tax deduction would allow the finance minister to give this question the straight answer it deserves.