Canada Child Benefit favours middle- and upper-income Canadians
The Trudeau government recently increased the Canada Child Benefit (CCB), a tax-free benefit paid to eligible parents with children under the age of 18. From the CCB’s inception in 2015, when it replaced two existing programs, the government’s common refrain has been that the CCB better focuses assistance to lower-income families, lowers child poverty and is an overall better program. But in reality, the CCB spends more on middle- and upper-income families than its predecessor programs, requires borrowing and is much more expensive than it needs to be.
For context, the Harper government expanded the previous two programs before the Trudeau Liberals replaced them with the new CCB and increased its cost again. In 2016-17, for instance, the first full year of the new CCB, it was 22.8 per cent more costly than the previous two programs. And critically, the increase in cost was financed by borrowing, meaning the children of the parents receiving the CCB will be saddled with its long-term costs. According to the federal budget, the CCB will cost $25.2 billion this year, making it one of the most expensive federal programs.
Several analyses have concluded that a larger share of spending under the new CCB finds its way to middle- and upper-income households compared to the previous two programs. However, no analysis to-date has accounted for the tax-free nature of the CCB. This is important because the after-tax value of the benefit increases as one’s tax rate increases, which benefits middle- and upper-income Canadians.
Consider a person earning less than $50,197. He or she must earn $118 in pre-tax income to generate $100 in after-tax income (accounting for federal tax rates only). Someone making $221,708 must earn $149 to receive the same $100 after tax because of their higher tax rates. So getting a $100 benefit after-tax has a much higher pre-tax value for the higher earner than the lower-income worker.
A recent study incorporated this tax effect into its analysis and concluded that the share of total CCB spending for families with incomes under $60,000 declined from 42.9 per cent under the two previous programs to 29.7 per cent under the new CCB. At the same time, families with incomes between $60,000 and $180,000 experienced an increase in their share of spending from 49.2 per cent under the old programs to 66.8 per cent. And families with incomes above $180,000 experienced a reduction in their share of total CCB spending from 7.9 per cent to 3.5 per cent.
Simply put, the design of the new CCB results in a greater share of money being redistributed to families whose need is questionable. Had the new CCB better targeted assistance to lower-income families, the same or perhaps even higher benefits could have been provided at substantially less cost and likely without having to borrow.
As Ottawa continues to struggle with deficits, policymakers should make a greater effort across many programs to ensure assistance is provided to Canadians in genuine need. More effective targeting of the CCB would allow for continued assistance to lower-income families but with lower overall program costs.