Why Low-Income Families Face High Tax Rates

The marginal effective tax rate on personal income has declined for most Canadians over the past decade, but has risen for many low-to-middle-income families with young children, which reduces their gains from earning more income, according to a report from the C.D. Howe Institute. In “What’s My METR? Marginal Effective Tax Rates Are Down – But Not for Everyone: The Ontario Case,” authors Alexandre Laurin and Finn Poschmann say Ontario is a case in point, with marginal effective tax rates over 50 percent for many low-to-middle-income families with children, and the share has risen in 2011 compared to 2000.

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The marginal effective tax rate (METR) on personal income, explain the authors, measures the impact, on take-home pay, of federal and provincial income taxes combined with the impact of reductions and clawbacks of income-tested tax credits and benefits as individual or family income rises. These income-tested credits and benefits mostly target financial support to low- and middle-income families with children, or to low-income seniors. As their income rises past prescribed thresholds, clawbacks and reductions begin, raising the METR on each dollar of incremental income above the threshold. The authors find that a decade after the federal government implemented a significant personal income tax relief program, METRs are lower for most Canadians, but for many families with children, they are higher – almost five percentage points higher for families with income under $45,000 in Ontario, for example – mostly because of increases in targeted benefits and credits that have income tests attached. Policymakers interested in keeping down METRs overall, say the authors, should consider reinvigorating the personal income tax relief imperative, rather than implementing or expanding targeted benefits that make general tax relief more difficult to achieve. For the complete study (PDF):