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This refundable tax credit could reduce income inequality

This column part of The Globe's Wealth Paradox series – a 10-day in-depth examination of our growing income inequality and the best ideas available for improving upward mobility for all.

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A reasonable goal for public policy would be to eliminate inequality in the lower half of the income distribution, to have everyone standing at least one-quarter of the way up the income ladder.

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For a single person this would require an annual income of $20,000, and for a two-parent family with two children about $40,000. At last count about 3 million Canadians, including 570,000 children, don't have that much money.

The way to change this is simple: Just give them more money!

If only it were so.

The law of unintended consequences can undo the best of intentions: Give people money, and it should be no surprise that they will work less.

This is why social policy now comes with strings attached.

The Working Income Tax Benefit, which the government describes as an earnings supplement for low-wage workers, pays no benefits unless someone is making more than $3,000 a year, and pays more as a claimant earns more.

This creates a strong incentive for those not working, and possibly collecting welfare, to jump into the job market rather than withdraw from it.

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But the program, which has the potential to play a big role in the fight against low income, is not generous enough to have a major impact: It provides a maximum of $970 a year for someone making at least $5,800, but less for each dollar earned above $10,000 or so, amounting to nothing at all for those with incomes above about $17,500.

The rates for families are higher, but in the end do little to give the working poor a significant boost.

What is holding the government back?

This is an expensive program, and costs are surely part of the story, as is the fear those already working will slack off. But proposals to enhance the WITB have to be judged by taking into account all of the costs, and all the benefits.

For example, kids raised on the bottom rungs of the income ladder have a disproportionately large chance of growing up to be low-income adults.

Being raised in a family with more money improves the odds of breaking out of an inter-generational cycle of disadvantage, but how the parents get the money also matters.

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Working is much better than passively receiving a government cheque, since welfare and unemployment insurance also have a way of being transmitted from parent to child.

The inter-generational benefits of having working parents, and of lowering the time and financial stress they face, even if they work fewer hours, is also an unintended consequence of the program and one that speaks to a real benefit.

In fact, the often-overlooked, perverse incentive from expanding the generosity of this program is that it may succeed too well in increasing work effort.

Would a substantial rise in benefits flood the market with low-wage workers, create more competition for jobs, shift bargaining power to employers and induce them to lower wage rates even further?

Although the law of unintended consequences will always be in force, it need not be a showstopper.

If we think hard about all of the costs and all of the benefits, proceed steadily and incrementally while learning along the way, there is no reason why the WITB can't reduce some of the most damaging consequences of greater inequality by lifting those at the bottom of the ladder.

Miles Corak is a professor of economics at the University of Ottawa. He blogs at milescorak.com and you can follow him on Twitter @MilesCorak

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About the Author
Professor of economics

Miles Corak is a professor of economics with the Graduate School of Public and International Affairs at the University of Ottawa. More

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