Yesterday, the Minister of Employment and Social Development lead a cross-country simulcast photo-op in questionable Cabinet attire and I turned down requests from a bunch of different media outlets to talk about it. My tweet (then at 2 media refusals) citing childcare as the ironic reason seems to have had some traction. So here’s some of what I might have otherwise said (and might yet say) on air about the day’s ”œChristmas in July”, ”œyour kids your way” pre-election extravaganza.
First, let’s just get the cloying ”œyour kids your way” communications out of the way, shall we? This is a ramped-up version of the ”œchoice in childcare” line used in the 2006 election and similar to the line used by Stephen Harper in at least a few partisan speeches celebrating parents as ”œthe real experts on childcare”.
In fact, all parties have ideas about Canadian families that they would like to see enshrined in public policy. As I’ve written elsewhere, all families with kids provide childcare and all kids need early learning and care. Some families use formal daycare, some don’t. One-sized policy, whether in the form of flat benefits or flat services is unlikely to be responsive to enough families to be worthwhile. But let’s tone down the reckless references to imagined intrusions on parental responsibility, shall we?
Next, I am pleased that the media coverage I saw/heard/read was careful to emphasize that the Universal Child Care Benefit is taxable income. This seems like an improvement over coverage that characterized the UCCB spending boost as a tax cut. While parents today may have received a lump sum, a portion of that will be taxed back next Spring. All else being equal, a slightly larger share of UCCB might be taxed back this year than last (no, this does not mean you will be ”˜in the hole’). This may be true for you if you aren’t one of the minority of families who qualifies for the Family Tax Cut and may be in part because the ”˜universal’ Child Tax Credit (a 15% non-refundable credit for each child under 18) was cancelled to help defray the cost of all this new transfer spending. The inimitable Luke Kawa was first to point out that the net effect of last fall’s family policy announcement from the CPCs was a small tax hike to help pay for a much larger increase in direct spending.
So, no this is not a tax cut. It never has been. To get a sense of the extra tax you’ll eventually pay on today’s cash transfer, you could consult any number of the marginal tax rate calculators out there. If you use an income-tested subsidy for daycare, housing, extended health benefits or more, I regret to inform you that I have yet to see a reliable marginal effective tax rate calculator that includes claw-backs on other benefits. I hope that you will be able to find personalized and accurate financial information in your community. A reminder to those families with two parents, you get to work out the future tax liability in the hands of the lowest income spouse. Single parents receiving the UCCB, sorry. As per usual, you’ll be left to handle this on your own. But do look into claiming the UCCB as deemed income for a dependent child. Whatever your family circumstance though, any official touting this as some generous gift that should be spent freely is irresponsible and all kinds of wrong.
Which brings me to a critique of the UCCB that really bears repeating. From the perspective of kids, this policy treats them differently according to how many parents and how many earners they rely on. I’ve written about this at some length here. Rather than repeat myself, I’ll just point out that a previous Conservative government (Mulroney) decided against flat, universal child benefits, in part because they seemed unfair.
Is it ”˜fair’ that the child of a senior bank executive (or senior government official) is eligible for the same cash benefit as the child of a parent on social assistance? This is, in some bloatedly general way, maybe procedurally fair in that all Canadian children are afforded the same treatment before the Canada Revenue Agency. But when I was quoted saying UCCB rules “don’t care how much you make, don’t care whether you use daycare, just a flat amount per kid”, I wasn’t being complimentary. A uniform cash benefit, procedurally, amounts to ”œyour kid, MY way”. Substantively, it means that what you really get depends on a host of other factors, most of which have nothing to do with the needs of your child – things like your ability to get good financial and tax advice and your ability to shift a tax burden to someone else in your family. How is that fair?
That previous Conservative government mentioned above also decided that uniform, flat child benefits were inefficient. Let me say a few more words on this. If your understanding of what government does is largely constrained to forms and clerical tasks, then a flat cash transfer looks simple and easy. There is little for government to do beyond verifying that your child exists and cutting a cheque. On the other hand, if you think that government should be a little more alert at the wheel, then it starts to look crazy to keep giving a lot of tax money away with one hand only to bring too much of it back with the other, plus the welfare costs in effective tax rates and deadweight losses. The more efficient policy is to invest some effort (not extravagantly so) to figure out who really needs what and then use that information to get a better balance on taxes-in vs dollars-out.
Last, but hardly least, I have to say something about the supposed ”œwell-timed” stimulus effect this Christmas-in-July bonus is suddenly supposed to have on the behavior of parents.
The use of the words ”œwell-timed” by the responsible minister might mean either ‘anticipatory’ or ‘fortunate’. The former isn’t a good political line. It would imply the government knew in the Fall about the future likelihood of a technical recession. This seems factually unlikely. But the latter isn’t exactly great political stuff either since it implies a certain ‘flying by the seat of our short pants’ approach that runs counter to the way the CPC wants to play this election.
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But let’s give folks the benefit of the doubt and ask what if this lump sum cash to parents isn’t just an Aunti Mame call to have a little Christmas in July. How are parents likely to spend this lump sum and what impact might those choices have?
The government is correct in claiming that it’s been a long while since Canadian families could look forward to this kind of one-time cash transfer. You may even need to go back to the post-war cash transfers and benefits paid to demobilized vets of World War II to find a larger example of a lump-sum promised to as many Canadians. Those demobilization benefits were much bigger though, as a share of federal spending, and the stakes of stimulating consumer spending to avoid recession or worse were much larger. The point is we don’t have great evidence from Canadian examples to drawn on.
There is some research form the US. A lot of it has been on the Earned Income Tax Credit (EITC), a lump sum refundable credit paid to eligible singles and parents when they file their taxes, where most recipients seem to know to expect this money. The research is pretty mixed.
On the one hand, a Brookings Institute study finds that $1 in EITC can generate as much as $1.58 in local economic activity. But this study seems to find this effect mostly in areas of low economic growth and, because the EITC is an income-tested it’s plausible that local economic development will be bigger where poverty is more highly concentrated. Also, by 2012, the use of refund anticipation loans (high interest credit against the future EITC windfalls) had become so frequent that federal regulators stepped in. The practice of expensive pre-spending of refunds continues among fringe financial service providers and possibly via credit cards. For some households, it’s possible that the true net welfare and stimulus effects of lump sum transfers may be neutral or even negative. I’m keen to hear more on this from smart researchers like Lauren Jones on this.
Other research on the EITC finds that households can be induced to save the money but will otherwise divide it almost equally between making ends meet and using it to improve their social mobility. It’s not clear that either provide an immediate stimulus effect to the economy. Again, this evidence about is an income-tested lump sum benefit in the US, in contrast to the UCCB in Canada but it’s instructive to think about differences in the marginal propensity to consume or save, depending on the full range of opportunities and incentives available to a family. Families, reasonably so, try to make the best decisions they can for their own best interests, not that of the economy. At least one study on anticipated lump sum changes in child tax benefits in the US found that there was no measurable stimulus effect from the policy and cast doubt on the use of tax credits for children as fiscal stimulus.
In Canada, households in the bottom income quintile have, on average about $500 in cash assets, suggesting that UCCB money could help with making ends meet. But they also don’t tend to have the debts that middle-income and wealthier families hold so debt-repayment uses are more likely to happen up the income ladder. Some recent research on changes to child benefits in Canada suggests that when the monthly cash transfers go up, lower-income parents tend to use the money in ways that can improve outcomes for their children. This is a good news finding, suggesting that fears of beer and popcorn spending sprees have been overstated and we can trust parents, at all income levels to make decisions in the best interests of their own children. It’s an open question whether these decisions will also turn out to be in the best interests of the economy.
The economic argument for spending on children has most often been framed in terms of social investment: targeted spending, especially earlier in life, is thought to lead to life-long pay-offs in improved outcomes, reduced state dependency and higher productivity. That’s been the gist of a lot of the economic argument for investments in income-tested child benefits and investments in early learning care. Isn’t that, ultimately what we’re supposed to be spending public money on – making life better for kids in Canada?
Those social investment arguments have presumed more targeted investments though, rather than flat cash transfers or uniform services at flat rates. Furthermore, those arguments have also presumed that the time horizon for the return on the investment is years, or even decades. Not the delay between a Summer spending blitz and a Fall election.
There you go, were it not for my challenge to negotiate the various transportation, supervision and nutrition needs of my children (two of whom were, for what it’s worth in a high quality program for which I do and should continue to pay more than $15 per day), I might have said some of the above yesterday on air. But I’m quite happy to have my kids my way and I’m lucky enough not to need a Christmas bonus to make that happen. I’d rather that Minister Poilievre didn’t waste time and public money trying to fill my stocking.