The Political Economy of Income Redistribution in Canada and the US

by Terrance Hunsley

President Biden is proposing to increase the Child Tax Credit from $2,000 to $3,600 annually for children under age 6 and to $3,000 for children under age 18.  He is also proposing to make it fully refundable, so that people with low or no income would get the full value.  It is a temporary measure, for a year, but supporters of it hope it might then be left in place.

This would be a significant change for income redistribution in the US.  Up until now the benefits of the Child Tax Credit have been aimed at those who are fully employed and earning good incomes (up to $200k for a single and $400k for a couple). People only get the full credit if they earn a defined level, and if they earn less, they get less. If they earn nothing they get nothing.  Which has left a lot of black and hispanic children living in poverty.  

Social impact of the credit in the US

The credit redistributes income horizontally, from people without kids, to those with kids. The society benefits because women stay in the work force,  and it supports children who will eventually be the workers who support everyone else. This doesn’t always register with singles and couples without kids who complain about supporting someone else’s children.  The credit also garners broad suburban voter support.

The change may be temporary…

Biden’s proposal will not be easily accepted for the long term because most Americans want the poor to work in low wage jobs rather than redistribute money to them. There is not much social mobility in the US lower income ranges because many of the poor (especially black men) have been incarcerated for minor crimes, had low quality education, and have higher levels of disability.  So Americans may prefer that it be middle class families who have the children. 

And having many people work in low wage jobs also results in a subtle but sizeable subsidy for the middle and upper class.  The big macs and coffees they serve, the products they put on shelves, the care for the elderly – are all cheaper to purchase because they are paid so little. A bit like a slave economy, but with no moral guilt. 

Canada is different in some ways, the same in others…

The Canada Child Benefit has been refundable since its inception.  It is a form of both horizontal redistribution (from people without kids to those with) and vertical redistribution (high and middle to low and middle income).   As it is a federal expenditure that has grown over time, it has also relieved provinces from paying more through social assistance. That redistributes income from richer provinces to poorer ones. The full credit is now $6765 for a child under 6 and $5708 for one under 18, so it has greater impact at lower income levels before it starts phasing out.  

It has had quite a magnificent effect of reducing poverty of parents with children. That augurs well for the life course of the children, and for the future work force, when the redistribution will be paid back through seniors’ benefits and health care.  In fact, it is the combination of better conditions for low income families, and access to good quality schools and teaching, which supports Canada’s better social mobility for poor children. 

But other factors keep the poor in place…

Again, the redistribution is not all in one direction. Canada, like the the US, has one of the largest proportions of workers in low wage jobs in the OECD countries.  With 19.4% of workers earning less than 2/3 of median wage, we are well above the OECD average of 15.3%.  

As in the US, this large supply of – you might say – economic slave labour – is very good for the rest of us. It subsidizes us by keeping our prices low. And since those purchases are made with after tax income, the subsidy is even more important. We might even speculate, given that the low price subsidy is spread among so many middle and high income people, that there could be more vertical subsidy going upward, than there is vertical redistribution going downward.   

We maintain these low income jobs by keeping minimum wages low, and by permitting employers to organize work in such a way that unions have a hard time forming, and the workers have no bargaining power. We reenforce the need to take up those low wage positions by keeping social assistance payments at a level which will not sustain life without begging – so the only option to low end work for those with addictions and hidden disabilities, is begging on the streets.

Hmmm. Makes you think about systemic discrimination…. 

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