Canadian and US Child Tax Benefits Pursue Different Objectives

Terrance Hunsley
Terrance Hunsley

A Canadian and an American think tank have recently both published studies about the distribution of benefits of the children’s tax credit in each country. Both studies concluded that the benefits were not sufficiently targeted to those in financial need. But there the similarity ends. The policy goals in the two countries differ widely. 

US Child Tax Benefit

The US study, published by Brookings, (NBER Working Paper Series, Who Benefits from the Child Tax Credit? by Jacob Goldin and Katherine Michelmore ) points out that a middle class or affluent family will receive more money than will a low income family. The US full benefit is $2000 per child, much smaller than the Canadian maximum benefit of $6765 for a young child and $5708 for a child 6-17.

The study found that for people whose earned income is too low for them to owe taxes, the maximum benefit (“refundable” portion) is only $1400 per child.  The benefit is structured to increase from $1400 to $2000, as the parent’s income increases. Moreover, if the parent does not earn at least $2500 per year, the benefit is zero. This is explained more fully in the following quote:

…The second limitation on CTC refundability is based on the taxpayer’s earned income. This earnings test imposes that the refundable portion of the credit is limited to 15% of the amount by which the taxpayer’s earned income exceeds $2,500. To illustrate, a taxpayer with $7,500 of earned income and one qualifying child could not receive a CTC refund above $750. Similarly, the earnings test prevents a taxpayer with $2,400 of earned income from receiving any CTC refund at all.

To receive the full benefit of $2000, the parent would have to earn at least $US24000 per year. This amount is 145% of the US federal poverty line for a family of two. 

In the US, social assistance is the responsibility of states and local government, much like in Canada, with federal governments contributing to state/provincial costs.  The US federal government restricts its direct transfers to those earning incomes. Both the Earned Income Tax Credit and the Child Tax Credit are structured to increase as the person’s earnings increase, up to a limit, after which they are phased out. The Child Tax Credit starts to be phased out after a lone parent earns $200,000, or a two parent family earns $400,000. 

Canada Child Benefit

In Canada, every child in a family with a net (after tax) family income under about $32000 is eligible for the full benefit of $6765 for a young child and $5708 for a child 6-17, regardless of their source of income (earned or social assistance). The Benefit phases out above that and reaches zero at about $215,000 net family income. 

The federal government has convinced provincial social assistance departments to permit people to receive the full Benefit without reducing their allowances for other living expenses.  

The Canadian study by the Fraser Institute has criticized the distribution of the overall government spending on this program, pointing out that… More than half of the total CCB (50.3 percent) is allocated to families with incomes of $70,000 or higher. (C Sarlo, J Clemens, M Palacios, Is the Canada Child Benefit Targeted to Those Most in Need? fraserinstitute.org)

It is not clear to me why the Fraser Institute would choose a family income of $70000 as a comparison point. Federal government data show that the average household income in Canada in 2017 was just over $93,000, and that data includes single person households. (https://www.cmhc-schl.gc.ca/en/data-and-research/data-tables/real-average-total-household-income-before-taxes)

So What are the Policy Objectives?

The Canadian program has a stated poverty reduction objective and has succeeded in pulling close to a half million children above the poverty line. The benefit is, relatively, a huge addition to the incomes of low income families.  It is also improving the health, education, and life course outcomes of children of low and modest income families. There is reason to be optimistic that the return on these early life investments will more than match their upfront costs through better long term employment and tax revenues, and lower health, justice, and unemployment costs in the future. 

There is also another objective to these transfers in Canada, which the current government has touted from the beginning but the Fraser Institute appears to discount. The transfers to the middle class are substantial. They reduce the inequality of market incomes, and help those families to achieve the lifestyle that they aspire to. 

There is a marked difference in inequality between the US and Canada (which the Fraser Institute has pointed out in other publications) and this is one of the tools that helps.  The benefit which goes to top end families is reduced, and that combined with their higher marginal income tax rates, means that the net impact on government finances is quite small.  But it is important to note that even people in the top ten percent do not necessarily see themselves as rich, and they relate more to being a contributing member of society, than they do to the super-elites in the top 1% or 0.1%.  So, although they technically may not need the benefit, the receipt of a reduced sum contributes to social solidarity. In the United States, there could be a similar effect, although the overall transfer is less.

The American study notes that the poorest families, who are excluded from the federal benefit, are disproportionately black and hispanic. The authors then point out that the benefit has been shown to improve children’s health, educational attainment and life trajectories, although the children in greatest need of these improvements do not receive the benefit. The structure of benefits results in systemic discrimination against those minority children who are excluded.   A quote from that study makes the point clearly:

…The vast majority of those in the bottom decile of the national AGI distribution are completely ineligible for the CTC, and the majority of filers in the bottom thirty percent of the distribution are only eligible for a partial credit. 

So the goal of the CTC in the US seems to be to encourage employment, especially when some jobs pay what might be called slave wages. A secondary objective of the policy, perhaps not stated, is to subsidize bottom feeder employers. A knock on effect may be that the prices of some consumer goods and services are kept low.   

Finally, it should be noted for both countries, that benefits for children are also a horizontal transfer of resources from those without children. While some may grumble that people who choose to have children should be prepared to pay the cost, the childless folks are also making an important investment. They want healthy national and local economies, and children’s health, education and recreation needs feed those economies. And maybe more to the point, the childless folks will want a continuing supply of healthy and skilled workers to support their pensions and health care in retirement.   

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