Quietly, without (much) fanfare, Stephen Harper's Conservative government has been gradually promoting a new model for income support programs: the Working Income Tax Benefit, or WITB.
On the face of it, WITB looks very similar to the Liberal government's signature program, Canada Child Tax Benefit (CCTB). Both WITB and CCTB provide cash support to low income households (in the case of CCTB, through the National Child Benefit Supplement). Taken together with other federal and provincial programs, they provide a poor working family with thousands of dollars a year in income support.
The two programs, WITB and CCTB, share a number of basic goals. Both aim to reduce poverty, and improve people's lives. Both aim to reduce dependence on provincial social assistance programs, by making it possible for people to survive on low wage or part-time work, supplemented WITB, CCTB and other refundable tax credits, without resorting to welfare. Finally, by making work pay better than welfare, both programs encourage labour force attachment.
Yet WITB differs from CCTB in a number of respects. The first is how it is framed and marketed. The stated goal of WITB is to provide "tax relief for eligible working low-income individuals". This makes little sense, as many of those eligible for WITB will pay no federal income tax. The WITB recipients who do pay federal income tax will find that WITB adds to their marginal effective tax rate, because an extra dollar of earnings will reduce their WITB payment. But I guess everyone wants a tax break, even people who don't pay much by way of taxes.
Second, WITB is available to low income singles and childless couples, as well as families with children. This matters because unattached people under the age of 65 are the Canadian demographic with the greatest risk of having low incomes. Whether one looks at the numbers before or after taxes and transfers, singles under 65 have a higher rate of low income than single parent families, people over 65, or any other group. The WITB isn't much, but it's a start.
The third important feature of the WITB is that it is conditional on undertaking some paid employment, at some point in the calendar year. The WITB is structured as follows:
- People with no earned income receive no WITB.
- For each dollar earned over and above $3000 per year, WITB increases by 25 cents (under the national program - BC, Alberta, Quebec and Nunavut have their own programs, with slightly different rules)
- Benefits continue to increase with income they until reach the maximum: a benefit of $1762 per year for couples or single parents, a benefit of $970 per year for singles (2012 benefit numbers).
- Recipients continue to receive the maximum benefits until their net income reaches $11,011 for singles, $15,205 for couples or single parents (in 2012).
- Once this net income threshold is reached, benefits are phased out at a rate of 15 cents per dollar of income.
One thing worth taking some time to understand is the difference between the way that WITB encourages work, and the way National Child Benefit does so. NCB encourages work by shortening the welfare wall. Provincial social assistance programs provide financial support, often known as "welfare", to people with no assets, no income, no other means of getting by. As a rough approximation, these programs have 100 percent tax back rates. They reduce benefits received by a dollar for each dollar earned.
Before the National Child Benefit was introduced, a single parent in need might receive, say, $15,000 a year in social assistance - and have to earn at least $15,000 before work paid better than welfare. With NCB, that same person might receive $11,000 in social assistance and $5,000 in NCB. If he found part-time work paying $15,000 a year, he would still lose the social assistance payments, but he would be able to keep the NCB. Work now pays a little better than welfare.
WITB, like NCB, can be retained when a person moves from social assistance into paid employment. But WITB adds in an extra kick - the 25 percent add on to any earnings - to strengthen the incentives to take up paid employment. Indeed, because WITB is conditional on having some earnings, long-term social assistance recipients might not receive any WITB at all - unless they are prepared to undertake some paid employment.
A final difference between WITB and child benefits (or other refundable credits such as the GST credit) is timeliness. People can apply to receive up to 50 percent their WITB payments in advance. This makes WITB into a more effective anti-poverty measure: people can get benefits when they need them. By way of contrast, if a person loses her job in January, 2012, her child benefits will not adjust until June, 2013, considerably lessening the ability of child benefits to fight poverty and reduce reliance on social assistance.
WITB aims, in part to encourage other Canadians to enter the workforce (that "other" conveys a subtle message: you're hard working and deserve tax relief, other people need to be encouraged to work harder). But is it effective? In theory, the effects of WITB on work incentives are ambiguous - the 25 percent subsidy for people earning just over $3,000 a year encourages paid employment, but the phase out adds to effective marginal tax rates, discouraging work effort.
What about empirical evidence? I haven't been able to find any. William Scarf and Lei Tang have a paper in Canadian Public Policy on the WITB. Like a lot of Canadian policy papers, it's a "pre-valuation"; an assessment, before the policy is actually implemented, of its probable impacts. They predict that a WITB-type policy would cause unemployment to fall by between 0.2 and 0.17 percentage points, and the average incomes of WITB recipients to rise by 3.9 to 8.6 percent. Their model is interesting in that the the decline in unemployment is driven by efficiency wage type considerations. The idea is that WITB makes minimum wage employment more attractive (relative to the alternative of not having a job), so people exert more effort in minimum wage jobs, productivity increases, firms hire more minimum wage workers, and unemployment falls. I'm not sure if I buy their story - but I couldn't find any other ones out there.
Even though it is a small program, and it is hard to say anything concrete about its impacts, the WITB reveals a great deal about the workings of Canadian public policy.
First, there are those, including some who write regularly on this blog, who would like to see Canada introduce a negative income tax, or a guaranteed annual income. They would like to take the alphabet soup of programs - WITB, CCTB, NCBS, HST refund, GST refund, GIS... - and roll them all into one simple straightforward program. That will never happen, and the WITB shows why. Every government prefers taking credit for a new initiative to enriching a program associated with their predecessors. Governments want programs that reflect their own values and priorities. They tweak program design to favour particular voting blocs, or to subtly encourage people to make certain types of choices. Even if we could magically create a guaranteed annual income tomorrow, the next budget would contain some new measure, an "announcable" that the current government could claim credit for.
The WITB also reveals a great deal about the way policies are evaluated in Canada. Why are there so few published evaluations of the WITB? One reason is that programs like the WITB are hard to analyze (see Kevin Milligan's comments in the discussion below). A scientific experiment would randomly assign some people to receive WITB. Others, the "control group", would receive a "placebo" treatment. The difference between the two groups could be used to measure the impact of WITB. Yet because WITB was introduced in all provinces at the same time, there is no control group, no basis for comparisons. True, there are small differences in the structure of WITB across provinces - as noted above, BC, Alberta, Quebec and Nunavut have their own programs - and perhaps at some point some one will work out how to use those differences to assess the impact of WITB. But for now, we really can't tell if WITB has been successful in achieving its stated goal of encouraging work effort.
The other reason that there have been few evaluations of WITB is that no one has an incentive to carry one out. Academics are unlikely to try to assess the program. There have been so many studies of the US Earned Income Tax Credit that such programs are old news. A WITB evaluation would be hard to publish in a top journal - and top journal publications are what academics seek. Private consulting firms are profit-driven, and the money is in pre-valuations - policy makers will pay, prior to the implementation of a program, for an estimate of its probable effects. There is no incentive to find out what happens next.
What about governments? Perhaps there have been in-house evaluations of the WITB, but none have been made public (even the Department of Finance's tax expenditure analysis, usually so useful, has nothing). Since WITB was introduced in 2007, any positive effects of the program would have been swamped in the 2008 economic downturn, so I suspect it has been hard to find evidence of its success. This is another difference between the WITB and the National Child Benefit. The Liberal government published regular National Child Benefit Progress Reports. The present Conservative government has provided a series of reports on Canada's Economic Action Plan, but they are written in budget-speak, for example:
In 2012, if the WITB had not been introduced, a typical low-income single parent in Nova Scotia would have only kept about 28 cents of each additional dollar earned between $3,000 and $10,000, due to reduced benefits from federal and provincial income-tested programs and taxes. As a result of the enhanced WITB, the same family will keep about 53 cents of each additional dollar earned.
There is no mention of the increase in that single parent's tax rate when WITB is phased out...
Still, while WITB has value as a metaphor for Canadian public policy, it is vital not to lose sight of the bottom line: WITB provides support for some of the most vulnerable Canadians, and this is a good thing.
This post has been updated in response to comments made in the discussion below.