The WITB was established by the Stephen Harper government in the 2007 budget and further enhanced in the 2009 budget to help the working poor in Canada. It is modelled on the Earned Income Tax Credit (EITC) in the United States, which was introduced under the Gerald Ford administration in 1975 and has subsequently been expanded several times, with support from both Democrats and Republicans.
The policy is attractive across party lines in the US and Canada because it transfers substantial income to the working poor, while encouraging participation in the labour force. It is, in effect, a social welfare program with a strong pro-work bias, which has produced significant results. The EITC has been described as ”the single most effective antipoverty program targeted at working-age households" by the nonpartisan Tax Policy Center, and it counts conservative Speaker Paul Ryan and progressive Senator Elizabeth Warren among its supporters.
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The design of many low-income benefits often puts low-income Canadians in the difficult dilemma of choosing between pursuing paid work and losing public benefits. The trade-off can be steep. The clawback when one reports income can reach as high as a dollar-for-dollar, and can strongly discourage the decision to re-enter the labour force, particularly if a worker faces substantial transportation or child care costs. A basic test for good public policy should be that government benefits are carefully designed so as to minimize disincentives to engage in paid work.
The designs of the EITC and WITB are somewhat complex (the rate for the WITB, for instance, varies among the provinces or territories), and they differ with regards to their maximum benefits and income thresholds for singles, couples, and persons with disabilities. We will return to the problems resulting from this complexity below.
But their basic objectives are the same: to help the working poor find, maintain, and expand employment and still cover their basic living costs.
Evaluation of the WITB's effectiveness is limited for several reasons, including its short lifespan and the program's limited size and scope.
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The empirical evidence on the EITC in the United States is much richer, for several reasons. It has been in effect for over 40 years, it has undergone repeated changes during this time, and it has been subjected to regular scrutiny. Its effect has been striking:
- One estimate is that the EITC lifted approximately 6.5 million people, including 3.3 million children, out of poverty in 2015. The number of poor children would have been over 25 percent higher without the EITC.
- The EITC is directly connected with positive employment outcomes, such as encouraging large numbers of single parents to enter the workforce, contributing to higher wage growth, and even resulting in higher social security contributions and benefits. It also drove a 4 percentage point rise in mothers' employment.
- Studies show that young children in low-income families that receive the EITC (and/or the Children's Tax Credit), on average, have better health outcomes and perform better in school. An additional $1,000 in EITC benefits received by families with children boosts the children's annual income in adulthood by $883, or 3.7 percent.
- 61 percent of those who received the EITC between 1989 and 2006 did so for only a year or two at a time.
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How should we interpret these results in the Canadian context? With a more generous set of child benefits, the effects on children of the WITB will likely be somewhat smaller. It is less clear whether the employment impacts directly associated with the WITB will be bigger or smaller, given Canada's relatively strong welfare programs and child support programs. These unknowns reinforce the need for explicit evaluation of the WITB's effectiveness.
The case for expanding the WITB is strong, based on the preliminary evidence from its first 10 years of existence and the considerable body of research on the EITC. But three other reasons to expand it are worth mentioning here.
The first is that the political preoccupation with the middle class has led to a perverse scenario whereby upper-middle-income earners are receiving disproportionate benefits from the federal government relative to low-income Canadians, including the recent lowering of the second-lowest tax rate from 22 percent to 20.5 percent.
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The second is that the recent US election shows there is a critical need for a positive policy agenda that addresses the needs of workers dislocated by automation, trade, and other factors. Canadian policy-makers must be proactive and preclude the type of economic disconnect between blue-collar workers and the political class that fuelled the recent election of Donald Trump. While the WITB is not a substitute for a broader economic package to help regions undergoing permanent, structural change, it would serve to aid struggling workers in those parts of the country and show that they have not been forgotten by the federal government.
The third is that the Trudeau government has committed to deficit spending in the name of ”inclusive growth," and the evidence suggests that incremental increases to spending on the WITB is among the most effective means of achieving Ottawa's stated goals and priorities.
