The Rise of Refundable Tax Credits: Implications for the Canada Disability Benefit

Authors

Wayne Simpson, University of Manitoba

Document Type

Article

Abstract

Bill C-22, while vague, sets its sights on poverty reduction and financial security for persons with disabilities by establishing a Canada Disability Benefit that will be delivered as a refundable tax credit along the lines of the Guaranteed Income Supplement and the Canada Child Benefit. This article reviews the evolution of tax credits in North America from income exemptions to non-refundable tax credits to the rise of refundable tax credits in the modern tax system. It offers lessons from existing refundable credits and corresponding discussions around a guaranteed basic income to inform the design of a Canada Disability Benefit that would contribute significantly to income security for persons with disabilities.

Creative Commons License

This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Citation Information

Simpson, Wayne. "The Rise of Refundable Tax Credits: Implications for the Canada Disability Benefit." Osgoode Hall Law Journal 61.2 (2024) : 441-474.
DOI: https://doi.org/10.60082/2817-5069.4015
https://digitalcommons.osgoode.yorku.ca/ohlj/vol61/iss2/6

References

1 Wayne Simpson is a Professor of Economics at the University of Manitoba and a Research Fellow at the School of Public Policy, University of Calgary. His primary research interests are basic income, redistribution tax policies, and provincial finances.

2 1st Sess, 44th Parl, 2022 (first reading 2 June 2022).

3 Mia Rabson, “Bill to create Canada Disability Benefit reintroduced but with few details” (2 June 2022), online: The Free Press [perma.cc/CM6P-HFLT].

4 Ibid.

5 Ibid.

6 See Charles R Metzger, “Brief History of Income Taxation” (1927) 13 ABA J 662.

7 See generally Stephen Dowell, History of Taxation and Taxes in England Volumes 1-4 (Routledge, 2013), DOI: https://doi.org/10.4324/9781315889283.

8 See Robert B Ekelund Jr & Douglas M Walker, “J. S. Mill on the Income Tax Exemption and Inheritance Taxes: The Evidence Reconsidered” (1996) 28 History of Political Economy 559, DOI: https://doi.org/10.1215/00182702-28-4-559.

9 He also advocated a reduced tax rate for incomes between £100 and £150. Workers were still subject to significant indirect (customs and excise) taxes, which were regressive even after significant reforms in the 1850s. Ibid at 566.

10 Metzger, supra note 6 at 664.

11 Ibid.

12 Ibid.

13 Ibid at 664-65.

14 Ibid at 666.

15 The marginal tax rate was 1% on income under $20,000, 2% on income from $20,000 to $50,000, 3% on income from $50,000 to $75,000, 4% on income from $75,000 to $100,000, 5% on income from $100,000 to $250,000, 6% on income from $250,000 to $500,000, and 7% on income over $500,000. The income subject to taxation would reflect an initial exemption of $3,000. “Revenue Act of 1913” (7 March 2024), online: Wikipedia [perma.cc/36KS-W3L4].

16 Author’s calculations.

17 “Taxation in the United States” (28 April 2024) online: Wikipedia [perma.cc/6MH8-XLP3].

18 See US Department of the Treasury, Dependents, Standard, Deduction, and Filing Information (Cat No 15000U) (Internal Revenue Service, 9 December 2022) at 2.

19 See Livio Di Matteo, “Major changes to Canada’s federal personal income tax—1917-2017” (12 April 2017), online: Fraser Institute [perma.cc/5K2T-GGBQ]. The $2,000 individual exemption would be $35,098 if adjusted for inflation from October 1917 to October 2021 using the Bank of Canada inflation calculator. See Bank of Canada, “Inflation Calculator” (27 October 2023), online: Bank of Canada [perma.cc/FD32-5LUY]. The basic personal amount for a single individual for 2021 is $13,808 or only about 40% of the inflation-adjusted exemption in 1917. For the 2021 basic personal amount, see “Basic personal amount” (27 June 2023), online: Government of Canada [perma.cc/3WW5-HWCW].

20 It is difficult to find historical details on the income tax structure and the personal exemption between 1917 and 1975, but the exemption was not indexed until 1975 by which time inflation had increased by 264% from 1917. Hence, the exemption may simply have withered in terms of inflation and real growth in personal incomes.

21 See Canada, Report of the Royal Commission on Taxation, vol 3 (Queen’s Printer, 1966). These are prominent features of the report, often referred to as the Carter Commission, but the only mention of provisions for benefits for persons with disabilities was a passing and general reference to the possibility of registered deferred income plans.

22 See US Congressional Budget Office, Refundable Tax Credits (Pub No 4152) (Congress of the United States, January 2013) at 4.

23 See House of Commons, “Tax Reform 1987: The White Paper,” by Michael H Wilson (Minister of Finance), Sessional Paper (1987) at 29.

24 Ibid at 25.

25 There might be other credits and deductions, which are ignored for simplicity here. For example, there was a disability deduction that was also converted to a non-refundable tax credit at this time. See Department of Finance, “Tax Reform 1987: Income Tax Reform” by Michael H Wilson (Minister of Finance), Sessional Paper (1987) at 71.

26 US Department of the Treasury Internal Revenue Service “Publication 936 Home Mortgage Interest Deduction” (30 November 2023), online: [perma.cc/PV5C-WHTF].

27 Credits were introduced in Canada to promote fitness, family tax sharing, and public transit ridership in recent years, but these have been rescinded. See “All deductions, credits, and expenses” (28 February 2024), online: Government of Canada [perma.cc/AHK3-35ZC].

28 See Harvey Stevens & Wayne Simpson, “Toward a National Universal Guaranteed Basic Income” (2017) 43 Can Pub Pol’y 120 at 123-24, DOI: https://doi.org/10.3138/cpp.2016-042.

29 See Something to Look Forward To: A Suggestion for a New Social Contract (MacDonald and Co, 1943).

30 See HS Booker, “Lady Rhys Williams’ Proposals for the Amalgamation of Direct Taxation with Social Insurance” (1946) 56 Econ J 230 at 234, DOI: https://doi.org/10.2307/2225792.

31 See “Lady Rhys Williams’ Proposals for the Amalgamation of Direct Taxation with Social Insurance” (1946) 56 Econ J 230, DOI: https://doi.org/10.2307/2225792.

32 See “The Economics of Minimum Wage Legislation” (1946) 36 Am Econ Rev 358 at 365.

33 See Christopher Green, Negative Taxes and the Poverty Problem (Brookings Institution, 1967) at 55-58.

34 See Milton Friedman, Capitalism and Freedom 40th Anniversary Edition (University of Chicago Press, 2002) at 192.

35 Ibid.

36 Ibid.

37 Ibid.

38 See “An Exploration in the Theory of Optimal Income Taxation” (1971) 38 Rev Econ Stud 175, DOI: https://doi.org/10.2307/2296779 at 208.

39 See generally Wayne Simpson, Is Basic Income Within Reach? Building the Case Amidst Progress and Poverty (Palgrave Macmillan, 2021), DOI: https://doi.org/10.1007/978-3-030-66085-7.

40 See e.g. Angela Rachidi, “America’s Path Toward a Guaranteed Income for Families with Children: How Nixon’s Family Assistance Plan Shaped Antipoverty Policy” (27 October 2021) online: American Enterprise Institute [perma.cc/R6L2-BRWL] at 4.

41 Ibid.

42 Ibid at 5.

43 See Daniel P Moynihan, The Politics of a Guaranteed Income: The Nixon Administration and the Family Assistance Plan (Random House, 1973).

44 See Dennis J Ventry Jr, “The Collision of Tax and Welfare Politics: The Political History of the Earned Income Tax Credit, 1969-99” (2000) 53 Nat’l Tax J 983 at 995, DOI: https://doi.org/10.17310/ntj.2000.4S1.01.

45 Rachidi, supra note 40 at 6.

46 See Internal Revenue Service, “Earned Income and Earned Income Tax Credit (EITC) Tables” (8 March 2023), online: [perma.cc/9FWQ-HSBX]. For the phase out rates, see US, Congressional Research Service, The Earned Income Tax Credit (EITC): An Economic Analysis (R44825) (Library of Congress, 2018) at 6.

47 See “Efficiency and Tax Incentives: The Case for Refundable Tax Credits” (2006) 59 Stan L Rev 23 at 25.

48 See Congressional Budget Office, supra note 22 at 29.

49 See Batchelder, Goldberg & Orszag, supra note 47 at 33-34. Note that refundable credits are available “simply to correct for overpayments of income or excise taxes as a result of inherent inaccuracies of the withholding system, fuel ultimately being used for a non-taxable purpose, or taxpayer error” but these are quite small.

50 Ibid.

51 See Congressional Budget Office, Table 2 at 10. Actual expenditures under these tax credits for 2021 were $62 billion for the Premium Assistance Tax Credit, $73 billion for the Child Tax Credit, and $57 billion for the Earned Income Tax Credit. See Congressional Budget Office, “Budget and Economic Data” (January 2023), online: Congressional Budget Office [perma.cc/TKH5-ZD33].

52 Kenneth Bryden, Old Age Pensions and Policy-Making in Canada, (McGill-Queen’s University Press, 1974) at 131.

53 Ibid.

54 Nick Falvo, “The Introduction and Evolution of Child Benefits in Canada” (5 May 2017), online: Tamarack Institute [perma.cc/JR8F-VQHN].

55 The negative rate depended on the number of children in the family.

56 For a more extensive discussion of the evolution of the Canada Child Benefit, see generally Simpson, supra note 39 at 215-87.

57 See Department of Finance, “Budget Papers: Building Economic Renewal” by Michael H Wilson (Minister of Finance), Sessional Paper (1986) at 42.

58 See Government of Canada, “GST/HST credit - How much you can expect to receive” (12 May 2023), online: [perma.cc/6STX-C7D7]. The 5% negative tax rate remains to limit the benefit to incomes under $38,892. The GST credit was doubled for the last six months of 2022 to offset the impact of inflation on low-income households. See “One-time GST payment to support Canadians” (4 November 2022) online: Government of Canada [perma.cc/V5DF-F345].

59 “National Child Benefit Progress Report: 1999: Appendix 1 Government of Canada Statistics” (1999), online: Government of Canada [perma.cc/F9MS-8MXN].

60 See Government of Canada, “Canada Workers Benefit – How much you can get” (11 September 2023), online: [perma.cc/S97A-VD2U]. The maximum Canada Workers Benefit varies for residents of Quebec.

61 See “How Progressive Is the Canadian Personal Income Tax? A Buffett Curve Analysis” (2022) 48 Can Pub Pol’y 211 at 214-15, DOI: https://doi.org/10.3138/cpp.2021-087.

62 See “The Effects of Child Tax Benefits on Poverty and Labor Supply: Evidence from the Canada Child Benefit and Universal Child Care Benefit” (2021) National Bureau of Economic Research, Working Paper No 28556, DOI: https://doi.org/10.3386/w28556.

63 See Congressional Budget Office, supra note 22 at 13-14.

64 See supra note 38.

65 The Editors of Encyclopaedia Britannica, “James Mirrlees,” online: Britannica Money [perma.cc/7NR9-H4GQ].

66 See supra note 61.

67 See Takuo Dome, “Bentham and J. S. Mill on Tax Reform” (1999) 11 Utilitas 320, DOI: https://doi.org/10.1017/S0953820800002533.

68 See supra note 38 at 177.

69 See generally Emmanuel Saez, Joel Slemrod, & Seth H Giertz, “The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review” (2012) 50 J Econ Lit 3, DOI: https://doi.org/10.1257/jel.50.1.3.

70 See Equality and Efficiency: The Big Tradeoff (The Brookings Institution, 1975).

71 See Derek Hum & Wayne Simpson, “Economic Response to a Guaranteed Annual Income: Experience from Canada and the United States” (1993) 11 J Lab Econs S263, DOI: .

72 See Carmen Reinicke, “‘We can already feel the pinch.’ Families aren’t getting child tax credit checks for the first time in 6 months” (24 January 2022), online: CNBC [perma.cc/58TD-H52A].

73 Ibid.

74 See supra note 47 at 23-32.

75 See supra note 22 at 17.

76 See Tony Eardley et al, Social Assistance in OECD Countries: Synthesis Report, (HMSO, 1996).

77 “What is a Basic Income Guarantee?” online: [perma.cc/EA2C-ZCBE].

78 See Jeremy Temkin, “Tax Gap Estimates Show That Compliance Rates Remain Unchanged” (18 October 2019), online: Forbes [perma.cc/68PW-ZUNL].

79 See “Who Doesn’t File a Tax Return? A Portrait of Non-Filers” (2020) 46 Canadian Pub Pol’y 323 at 323, DOI: https://doi.org/10.3138/cpp.2019-063.

80 See Basic Income: Characteristics Related to Presence in and Absence from the Tax System (University of British Colombia, 2021) at 2, 6 [unpublished, archived at University of British Columbia Vancouver School of Economics].

81 See, supra note 22 at 17.

82 See Department of Finance Canada, “Budget 2023: A Made-in-Canada Plan” online: [perma.cc/RW4J-HCFP].

83 See Tax Policy Center, The Briefing Book (Urban-Brookings Tax Policy Center, 2020).

84 See Institute for Work & Health, “Workplaces face many complex challenges when managing episodic disabilities: study” (11 August 2020), online: [perma.cc/6MXE-3RR7].

85 See “The Case for an Income Guarantee” (1966) 4 Pub Interest 31 at 37.

86 Rachidi, supra note 40 at 4.

87 Ibid.

88 See Emmanuel Saez, “Optimal Income Transfer Programs: Intensive versus Extensive Labour Supply Responses” (2002) 117 Q J of Econs 1039, DOI: https://doi.org/10.1162/003355302760193959. The Canada Child Benefit includes both an income exemption and tax rates that differ with the number of children and their ages.

89 See Pertti Honkanen, “Basic Income and Negative Income Tax: A Comparison with a Simulation Model” (2014) 9 Basic Income Studies 119, DOI: https://doi.org/10.1515/bis-2014-0015; James Browne & Herwig Immervoll, “Mechanics of Replacing Benefit Systems with a Basic Income: Comparative Results from a Microsimulation Approach” (2017) 15 J Econ Inequality 325, DOI: https://doi.org/10.1007/s10888-017-9366-6; Hilary W Hoynes & Jesse Rothstein, “Universal Basic Income in the US and Advanced Countries” (2019) National Bureau of Economic Research, Working Paper No 25538, DOI: https://doi.org/10.3386/w25538.

90 See Gordon M Fisher, “The Development and History of the Poverty Thresholds” (1992) 55 Soc Security Bull 3.

91 See Joseph A Kershaw, Government Against Poverty (The Brookings Institution, 1970).

92 See Victor R Fuchs, “Redefining Poverty and Redistributing Income” (1967) 8 Pub Interest 88; Organisation for Economic Co-operation and Development, “Project on Income Distribution and Poverty” online: OECD [perma.cc/RNY8-4P9V].

93 The MBM has been refined in several respects and is now produced for fifty different regions, including nineteen specific urban communities. See Statistics Canada, “Market Basket Measure (2011 base)” (27 November 2015), online: Government of Canada www150.statcan.gc.ca/n1/pub/75f0002m/2013002/mbm-mpc-eng.htm.

94 See Government of Canada, “Guaranteed Income Supplement: Your application” (5 November 2023), online: Government of Canada [perma.cc/8V4V-AM9A].

95 See Canada Revenue Agency, “Canada Child Benefit” (4 July 2023), online: Government of Canada [perma.cc/R9BA-V3N6].

96 See “A Guaranteed Basic Income for Canadians: Off the Table or Within Reach?” (2022) 15 School Pub Pol’y 1, DOI: https://doi.org/10.11575/sppp.v15i1.75092.

97 RSC 1985, c 1 (5th Supp).

98 Ibid.

99 Ibid.

100 Ibid.

101 Poverty Reduction Act, SC 2019, c 29, s 315.

102 See Statistics Canada, “Low-income status of economic family” (29 November 2021), online: Government of Canada [perma.cc/JWL9-VFUB].

103 See “All in the Family: Assessing Need in the Fiscal Unit” (delivered at the Public Finance in the Real World: A Symposium in Honour of Richard Bird, April 2022) [unpublished] online: [perma.cc/M8AY-QTMV].

104 The analysis was conveyed in an email from my late colleague, Harvey Stevens, who passed away on 1 September 2022 and who will be greatly missed in the research and activist communities concerned with basic income and related social justice issues. Using the Social Policy Simulation Database / Model (SPSD/M) version 28.2, Stevens’ analysis also found that using the census family as the basis for defining family income would direct 64% of the benefits to poor families (below the MBM) and cost $47 billion, much better targeting than the nuclear family but not quite as good as the economic family, albeit likely accompanied by easier tax administration. See Harvey Stevens, “Re: Basic income report from the Atlantic Provinces Economic Council” (19 June 2022) via e-mail communicated to author.

105 “Canada child benefit” (13 June 2022), online: Government of Canada [perma.cc/QF8M-94SC].

106 “GST/HST Credit” (1 September 2023), online: Government of Canada [perma.cc/R9AM-TSPK] sub verbo “Eligibility criteria.”

107 The GIS allowance is also available for those sixty to sixty-four years of age with an eligible spouse or common-law partner.

108 See supra note 28 at 126.

109 There are also separate disability benefits available under the Canada Pension Plan, but we do not consider those benefits here. See Government of Canada, “Disability Tax Credit (DTC)” (24 January 2023), online: Government of Canada [perma.cc/6XNZ-DFGQ] [Canada, “Disability Tax”].

110 See Statistics Canada, “New Data on Disability in Canada, 2017” (28 November 2018), online: Government of Canada [perma.cc/7V2G-BEDV].

111 See Derek Hum & Wayne Simpson, “Disability Onset among Aging Canadians: Evidence from Panel Data” (2002) 21 Can J on Aging 117, DOI: https://doi.org/10.1017/s0714980800000696 [Hum & Simpson, “Disability”].

112 See “Canadians with Disabilities and the Labour Market” (1996) 22 Can Pub Pol’y 285 at 288, DOI: https://doi.org/10.2307/3551506 [Hum & Wayne, “Canadians”].

113 See Derek Hum & Wayne Simpson, The Economic Well Being and Labour Market Activity of Persons with Disabilities in Canada (Statistics Canada, 1993) at 7.

114 See Hum & Simpson, “Disability,” supra note 111; Cameron Crawford, Looking Into Poverty: Incoming Sources of Poor People with Disabilities in Canada (Institute for Research and Development on Inclusion and Society, 2013); David C Stapleton & Richard V Burkhauser, The Decline in Employment of People with Disabilities: A Policy Puzzle (Upjohn Press, 2003).

115 See Hum & Simpson, “Disability,” supra note 111.

116 The Low Income Cut Off (LICO) was used most as an unofficial standard for poverty in Canada until the passage of the Poverty Reduction Act in 2019 when the MBM was established as the official poverty threshold. See Crawford, supra note 114.

117 Additional evidence is provided by Stapleton and Burkhauser in their book, using the CPS, and also the National Health Interview Survey and Survey of Income and Program Participation. See Stapleton & Burkhauser, supra note 114 at 3-4.

118 On criteria for a “marked restriction” see Canada, “Disability Tax,” supra note 109. Criteria for a “marked restriction” are that you are unable to do the activity or that it takes three times longer than someone of similar age without the impairment even with the use of appropriate therapy, medication, and devices, that the restriction is present all or almost all of the time (generally at least 90%), and that the restriction has lasted or is expected to last for a continuous period of at least twelve months.

119 See Canada Revenue Agency, “Table 1: Number of individuals with a DTC certificate by a province/territory and restriction, 2020” online: Government of Canada [perma.cc/4BNM-VA4V]; Government of Canada, “Table 13: Number of DTC claimants benefitting through a tax reduction by BADL, 2011-2020” online: Canada Revenue Agency [perma.cc/VW88-VXUM].

120 The DTC certificate and its procedures may be an issue in the development of Bill C-22, especially in discussions with the provinces that have their own disability assessment methods, but we do not consider this issue in this article. For discussion of the limited overlap between the DCI certificate and provincial disability claimants, see Wayne Simpson & Harvey Stevens, “The Disability Tax Credit: Why it Fails and How to Fix it” (2016) 9 School Pub Pol’y 1, DOI: https://doi.org/10.11575/sppp.v9i0. As in other areas, the federal government might establish the current or a modified DTC as a standard but allow provinces some latitude in meeting the standard, along the lines of disability determination arrangements in the United States for social security disability insurance (SSDI) and supplemental security income (SSI).

121 See ibid.

122 The figures are derived using version 22.0 of the Social Policy and Simulation Database/Model (SPSD/M) projected to 2014. Ibid at 3.

123 Ibid at 4.

124 Ibid.

125 For further details, see ibid at 7.

126 Provincial non-refundable tax credit levels and rates vary considerably. Ibid at 8.

127 See Wayne Simpson & Harvey Stevens, “The Disability Tax Credit: Why It Fails and How to Fix It” (2016) 9:24 University Calgary School of Public Policy Research Paper at 13-15.

128 See supra note 120 at 4.

129 This is often referred to as the break-even level of the program which, in the case of the CCB, will vary with family composition. See Canada Revenue Agency, “Canada Child Benefit” (17 April 2018), online: Government of Canada [perma.cc/P7UF-SXHW].

130 See supra note 120 at 4.