by Kevin Milligan
Governments spend a tremendous amount of energy and money on tax policies related to children. To some extent, this attention may reflect a raw political calculation about who is most likely to vote and what kind of election promise will appear most tantalizing to the targeted voters. However, there is also a strong public policy case for child-focused tax measures. In the case of children, the instincts of politics and policy are broadly aligned.
While the policy case for child benefits is strong, our current way of delivering child benefits in Canada is broken and needs to be reset. It has become a tangled mess with too much overlap, obscured work incentives and confusion for everyone involved.
There is a logical foundation for differential treatment of families with children under our tax system. However, trying to make good on this principle of special tax treatment for children has resulted in overwhelming complexity. For example, a family in British Columbia in 2012 had to assess its eligibility for ten separate child-focused tax measures. These benefits cross paths, conflict and confuse. The way forward, I suggest, is to rationalize the cornucopia of credits into one delivery method (I propose a refundable tax credit), to remove overlap by consolidating existing measures into fewer programs, and finally to impose a seriously simplified structure on the whole system.
I limit my focus to straight income transfers delivered through the tax system, leaving aside tax credits for child-related expenditures such as childcare or fitness expenses as well as the expenditure side of the government budget (education, social assistance). I also keep my focus on federal and provincial systems excluding Quebec, since the particularities of the Quebec income tax and transfer system require a separate treatment I cannot accommodate in this article.
Why do we have specialized tax treatment for families with children?
Imagine two families of equal income, each with three members of varying ages. If one of the families had two children and the second had one, why should the family with more children be treated differently by the tax system? What makes a human aged five different from a human aged 25 from the point of view of the government? There are two types of answers to these questions. One is a concern for equity between families with children and those without. The second involves the quality of parental decision-making when investing in children – or “efficiency,” in the cold language of economists. I explore both the equity and efficiency arguments below.