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
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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
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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
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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.
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