FINA Testimony: Canada Workers Benefit

by kevinmil

Notes prepared for House of Commons Standing Committee on Finance
April 30, 2018
Kevin Milligan
Professor of Economics
Vancouver School of Economics, University of British Columbia

Topic: Bill C-74. “An Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018 and other measures.”

(PDF copy of these notes can be downloaded here.)

My name is Kevin Milligan and I am a Professor of Economics at UBC’s Vancouver School of Economics.  I’ve been asked to speak specifically about the new Canada Workers Benefit.

I’ve been studying the impact of tax benefits for modest income workers for 15 years, and the evidence from around the world is unusually strong and consistent. Benefits that are focused on providing an incentive for modest income workers to join the workforce have led to increased labour market attachment in the US, the UK, and Canada.

The existing Working Income Tax Benefit (or WITB) suffers from two major shortcomings.

First, it is too small. The maximum benefit for a single worker under the 2017 configuration was only $1,043, and that person would see no benefit if income is above $18,792. That means that a full-time full-year minimum wage worker in most provinces would see zero benefit from the WITB. In my view, this meant that the WITB was missing its proper target because it was too small.

Second, the WITB lacks salience. It is hidden away on the tax form, requiring the filing of a special supplemental schedule so people might not even be aware of it.  This has resulted in a substantial number of people who are eligible for the WITB not actually receiving it.

The proposed transition to the Canada Workers Benefit makes substantial and important progress in ameliorating both of these shortcomings.

The new CWB is larger.  The maximum benefit is 30% bigger for singles and 24% bigger for couples or those with children. As important, the income range now covered by the CWB is much larger—extending up to $24,112 for unattached singles and $36,483 for couples and those with children. This will mean a much larger proportion of modest-income workers will see the CWB increase the attractiveness of work compared to the old WITB.

The new CWB will also be easier to access. In a new and very important initiative, the Canada Revenue Agency will check tax forms that are filed to see if the taxfiler is eligible for the CWB. If the CWB schedule is not filled in, starting in 2019 the CRA will do so on behalf of the taxfiler automatically. Moreover, the government has committed to explore ways to pay out the CWB on a monthly basis rather than keeping it buried in the tax form.

Both of these measures—higher benefits and making benefits easier to access—are important advances. However, there is still more work to do. Here, briefly, are three ideas.

First, I think benefits still need to be larger, and extend up to $30,000 of income. Full time full year work is 2000 hours a year, and with the minimum wage heading to $15 an hour in some provinces, that’s $30,000 of annual earnings. In my view, the target should be to ensure a full-time full-year workers sees some benefit from the CWB so that we can help reward those who work.

Second, the government should continue efforts to make the benefit more salient. Economists spend a lot of time designing policies with good incentives to encourage positive responses from Canadian workers. But if those incentives are buried deep in complexity we can’t expect to realize the full positive response.  Separate notification and payment of the CWB outside the tax forms would be a step forward in furthering this needed salience.

Third, the government should undertake a study of the feasibility of “individualizing” the CWB as advocated by Professor Tammy Schirle of Wilfrid Laurier University. Individualizing means that the benefit is phased out based on individual income rather than couple income.  This would have an important impact on the work incentives for married women, which would give women a boost within the economy and our society.