The Family Tax Cut
The Family Tax Cut Office of the Parliamentary Budget Officer March 17, 2015 Summary • How FTC works and fiscal cost • Majority of gains go to higher income households • Small negative impact on labour supply • Cap impact 2 How Family Tax Cut (FTC) works Eligibility • Married or common-law • Children aged 17 or younger • Disparity in income and effective tax rates • • • • Mechanics Non-refundable tax credit A notional transfer of income Max transfer: $50,000 Max gains: $2,000 35% 30% MTR = 26% 25% MTR ATR 20% MTR = 15% 15% Income = $30,000 Taxes = $4,500 ATR = 15% 10% 5% Income = $100,000 Taxes = $19,480 ATR = 19.5% 0% 0 30,000 60,000 90,000 120,000 150,000 3 PBO projects a fiscal impact of $2.2 billion in 2015 Fiscal Impact 2.5 $ billions 2.0 1.5 Federal $2.2 billion 1.0 0.5 Provinces nil 0.0 4 Majority of gains go to higher income households FTC gains as % of after-tax income 0.4 0.3 0.2 0.1 0.0 1 2 3 4 5 6 7 Income decile 8 9 10 5 Eligibility drives distribution profile 30 FTC Gains (all households) 2.0 FTC Gains (if eligible) 1.5 20 FTC Eligibility Likelihood 1.0 10 Eligibility likelihood (%) FTC gains as % of after-tax income 2.5 0.5 0.0 0 1 2 3 4 5 6 7 Income decile 8 9 10 6 Effect on labour supply Changes to marginal effective tax rates 35% Primary earner $100,000 MTR = 26% 30% After transfer $65,000 MTR = 22% 25% Secondary earner $30,000 MTR = 15% 20% 15% + 7 p.p. 10% - 4 p.p. 5% 0% 0 30,000 60,000 90,000 120,000 150,000 7 Opposing effects on each partner’s effective wage Effective wage on an additional hour of labour (marginal effective wage) $/hour 30 25 20 Status Quo +13% FTC 22.7 20.1 -10% 15 11.7 10 10.6 5 0 Primary Earner Secondary Earner 8 Small net negative outcome (- 7,000 FTEs) and (-$90 million in labour income) Hours Change (thousands of annual FTEs, LHS) Earnings Change (millions $, RHS) 20 15 10 600 450 360 300 7 5 150 0 0 -5 -150 -10 -300 -15 -14 -20 Primary Earners -450 Secondary Earners -450 -600 9 Effect on labour supply Hours change (thousands of annual FTEs) 20 15 10 5 0 -5 -10 -15 -20 FTC 7 PIT Benchmark 7 3 -14 Primary Earners Secondary Earners 10 Cap limits gains to higher income households 0.7 140 0.6 120 Uncapped 0.5 100 Baseline 0.4 0.3 80 60 % increase from baseline 0.2 40 0.1 20 0.0 0 1 2 3 4 5 6 Household income decile 7 8 9 Per change from uncapped FTC FTC gains as % of after-tax income Distributive effects of the cap 10 11 Questions about this report? Mostafa Askari Assistant Parliamentary Budget Officer [email protected] 613-992-8045 Trevor Shaw Author [email protected] 613-698-6568 Tim Scholz Author [email protected] 613-219-1109 Visit our website www.pbo-dpb.gc.ca and look for the report under the publications tab. 12
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