Adjusting for the Canada Child Benefit's Tax-Free Status
— Published on August 18, 2022
- Despite the Canada Child Benefit (CCB) being one of the largest federal programs, no analysis to date has considered how the program’s tax-free benefits affect the distribution of overall CCB spending.
- Tax-free status matters because marginal tax rates greatly influence the level of pre-tax income needed to realize any given after-tax benefit. Consider that a person earning less than $50,197 of taxable income would have to earn $118 in pre-tax income to generate $100in after-tax income considering federal taxes only compared to a person making more than $221,708, who would have to earn $149 to receive the same $100 after-tax income.
- This analysis compares CCB spending adjusted for its tax-free status against both actual CCB spending and the spending done under the two previous programs (UCCB and CTTB).
- Five specific family types are analyzed (one in the body of the paper and the remaining four in appendices) as well as all eligible families.
- The total value of Canada Child Benefits in 2019 increases from an estimated $24.9 billion to $32.5 billion when the tax-free status of the benefit is included.
- When we compare the adjusted CCB spending against the actual CCB spending for all eligible families, we find that families with incomes below $10,000 experience no change in their share of the overall distribution of spending. Families with incomes from $10,000 to $70,000 experience a reduction in their share of total CCB spending—falling from 44.7 percent to 40.7 percent. Finally, families with incomes above $70,000 experience an increase in their share of total CCB spending: from 55.0 percent to 59.0 percent.
- The differences in the share of benefits are larger when we compare the adjusted CCB spending (to account for its tax-free status) against the distribution of spending under the two previous programs.
- Families with incomes less than $60,000 experience a reduction in their share of total CCB spending from 42.9 percent to 29.7 percent. Families with incomes between $60,000 and $180,000 experience an increase in their share of spending from 49.2 percent under the old programs (UCCB and CCTB) to 66.8 percent. Finally, families with incomes above $180,000 experience a reduction in their share of total CCB spending from 7.9 percent to 3.5 percent.
- The shifting of overall CCB spending towards middle- and upper-middle-income families when accounting for the CCB’s tax-free status is even greater than previous analyses concluded. While overall CCB spending increases compared to the two previous programs, the distributional shift to middle- and upper-middle-income families suggests the increases under the new program could have been better targeted to those families in need and potentially at a lower overall cost for the program.
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