STFC Committee Meeting

SUB-COMMITTEE ON TAX EQUITY FOR CANADIAN FAMILIES WITH DEPENDENT CHILDREN OF THE STANDING COMMITTEE ON FINANCE

SOUS-COMITÉ SUR L'ÉQUITÉ FISCALE POUR LES FAMILLES CANADIENNES AVEC DES ENFANTS À CHARGE DU COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, April 22, 1999

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[English]

The Chair (Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.)): Order. Pursuant to the motion adopted by the Standing Committee on Finance, dated March 17, 1999, the subcommittee now resumes its study on tax fairness for Canadian families.

I am pleased to welcome this afternoon, from Carleton University, Dr. Frances Woolley, associate professor, Department of Economics; and from Tristat Resources, Richard Shillington.

Would you mind presenting together? Then we'll just open up for questions. I think it makes more sense. We'll give you ample time to make your presentations, and then ample time also will be remaining, we hope, for members to ask their questions.

Since Mr. Shillington is still setting up, I would ask Dr. Woolley to make her presentation.

I welcome you.

Professor Frances Woolley (Department of Economics, Carleton University): We're both due at the same lunch in a little while, so this is very convenient.

These are not easy times to raise a family. Average male earnings are the same today, in real terms, as they were in the 1970s. Family incomes have risen because women have entered the labour force in unprecedented numbers, easing financial pressures but creating time stress.

Almost one child in five in Canada is raised in a single-parent family. At a time when most families need two earners to get by, these children run a high risk of poverty. So too do children of young parents.

Incomes of men between 25 and 34 fell 12% between 1981 and 1996. Recent immigrant families are also facing a rapid deterioration in their labour market prospects. Today almost 20% of children under 18 live in low-income families.

Policy-makers in the early 1990s, trying to fight child poverty at a time of fiscal restraint, chose to target tax relief on poor families. In so doing, they financed gains to the poorest families by taking money away from children in other families.

Today a significant minority of families falls through the gaps in the system. For example, an average-income, dual-earner family with two teenage children will receive either no or only trivial tax recognition for the cost of raising children. The result? A system with horizontal inequity between those who do and those who do not have children.

A number of changes to the tax system have been proposed, most of which will do little to remedy the basic problem. Some analysts are calling for joint taxation of married or cohabiting couples. Joint taxation in the form of income splitting would reduce the tax liabilities of some single-earner couples. However, these tax savings would be poorly targeted toward families with children. Almost 20% of families with children are single-parent families and would receive no help from income splitting.

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The majority of mothers of young children are employed—55% of women with a child under three and almost 60% of women with a youngest child between three and five. Indeed, the group of married women who are least likely to be in the labour force are women between 45 and 64, of whom 40% are employed, not women in the peak child-bearing years, 70% of whom are employed.

Basically, joint taxation would not deliver benefits primarily to families with children. It's not an effective way of helping families with dependent children.

Mr. Paul Szabo (Mississauga South, Lib.): I wonder whether Dr. Woolley would, where possible, advise us on where the source of her information is coming from. There's quite a bit of data there, the credibility of which is enhanced when it's linked to its source.

Prof. Frances Woolley: Okay.

The ones in this paragraph are taken from a Statistics Canada report called Women in Canada, the third edition. Basically all of the statistics come from Statistics Canada.

The numbers on single-parent families are taken from the 1996 census. That's the number I have for the percentage.

I'm fudging a bit, because 1999 figures are not available, obviously, and a lot of these are from 1996 or 1997. I've taken the most recent numbers I could get.

Joint taxation is, furthermore, inequitable. Because the work at-home parents do has value, a family with an at-home parent is better off in real terms than a dual-earner family with the same money income.

Statistics Canada—and this is taken from a publication by Chris Jackson on social trends in 1996—has estimated the replacement cost value of a married at-home mother's unpaid work at over $24,000. It is true that people who are employed do household work as well, so this is an overestimate of the benefits of having a parent stay home. However, the average replacement value of unpaid work for a Canadian adult is about $11,000 per year, suggesting that a stay-at-home parent creates over $13,000 more household production than an average Canadian.

So essentially, a family with a stay-at-home parent is thousands of dollars better off than a family with two parents in the workforce at the same level of money income. That means joint taxation, which taxes those two families at the same level, is inequitable.

Other analysts have advocated reintroducing a deduction for dependent children. While it's a better proposal than joint taxation, it is still not the best option. Deductions are worth more to higher-income earners and therefore would compromise the progressivity of the tax system. Moreover, because deductions are worth most to the parent in the highest tax bracket, they would tend to be claimed by the higher-earning parent, who in most cases is the father. However, there is considerable economic evidence in favour of the “good mom” hypothesis. Transfers to mothers have a greater effect on children's well-being.

For example, when Britain substituted child benefits paid to mothers for an income tax deduction received by, in most cases, fathers, family expenditure patterns changed measurably, with more money being spent on, for example, children's clothing.

This number comes from a study in the Journal of Human Resources by a number of distinguished economists.

Studies in developing nations have found income in the hands of the mother has a greater effect on the family's health than income under the control of the father.

The best solution is to provide a universal child benefit. Universal benefits have obvious equity benefits. Universal benefits reach families with children. They can be paid directly to the parent who is the primary caregiver, which in turn means they are more likely to be spent on items of direct benefit to children. Furthermore, they increase the economic autonomy of at-home parents.

Universal programs have more subtle efficiency benefits. The tax back of benefits from families with children can result in effective tax rates that, in certain income ranges, are more than double the statutory rate.

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For example, if you take a family earning between about $21,000 and $26,000, the tax back of benefits at present, although it's being reformed to improve it, adds almost 27% to the statutory tax rate, taking it from, say, about 25% to over 50%.

Universal child benefits equalize the effective marginal tax rates between those with and without dependent children. Those who argue that universal benefits are too costly and would require an unacceptable increase in tax rates overlook the fact that taxing back benefits is also costly because it involves even more extreme increases in tax rates.

In summary, families in Canada struggle today for two reasons. The first is that they have caregiving responsibilities that take time and resources. The second is that they have poor labour market outcomes. If caregiving is the problem, then any tax recognition of families has to be specifically tied to caregiving. So it has to be tied to the presence of children.

The problems with labour market outcomes need to be addressed through, for the most part, policies outside the tax system—for example, through reforms to employment insurance that would allow mothers re-entry into the workforce after spending time at home, giving them access to training programs.

In summary, universal benefits are the best way of helping families with children. Joint taxation is the worst, with deductions or non-refundable credits a middle ground.

Thank you.

The Chair: Thank you, Dr. Woolley.

I'd like to now invite Mr. Shillington to make his presentation, please.

Mr. Richard Shillington (Individual Presentation): First off, thank you for this invitation. I'm appearing as an individual, and do not represent any organization today.

Due to the time available, I'm not going to talk about how the tax and transfer system deals with single parents. This is an important issue, but time allows me to make only a limited number of points.

As well, I'm not going to speak about low-income parents today. Again, it's an important group but they don't directly enter into the one-earner/two-earner tax debate.

I'm going to speak first, for just a moment, about the tax treatment of families with children in general, and then I intend to spend more time talking about the tax system and how it deals with one-earner and two-earner families.

I expect most of your witnesses will point out the obvious, that our tax system knowingly discriminates against parents in general by having no tax recognition and no horizontal equity. I'm not going to spend a lot of time on that except to say that Canada has ignored the ability-to-pay principle with respect to parents. Over the 1980s and 1990s, the share of the tax burden borne by families with children has increased relative to families without children.

If I were breeding horses and racing them, Revenue Canada would have no problem with my deducting the full cost of feed, shelter, exercising, daycare, handlers, riders, and heat for the barn as expenses for maintaining those horses. For children, we have no such tax recognition of the non-discretionary expenditures to support children.

Before leaving the horizontal equity issue, I want to remind the committee that until 1985, I believe, there was a deduction not only for children zero to 17 but also for children over the age of 17 if they were in post-secondary education. If you believe supporting your child while they are in post-secondary education is non-discretionary spending that affects your ability to pay, then in fact there should also be a tax recognition for those children as well.

I'm now going to make some comments about the tax treatment of one-earner versus two-earner couples. I do this against my better judgment, because it's really a touchy issue. Emotions are not very far from the surface in this debate. I do think this is an important issue, though, so I'm going to take the risk and say a few things about the tax treatment of these types of families.

How do we want the tax and transfer system to deal with a decision of a parent, usually the mother, to stay at home and raise children? I say “usually” the mother, but it's quite possible that within the next decade or so that will change substantially. Right now, I believe, in about 25% of couples the wife earns more than the husband. With educational trends, it's quite possible in the near future that you're going to have situations where the wife can earn more than the husband. When biology trumps opportunity costs, we'll see who is going to be staying home in those circumstances.

Let's first recognize that these parents who stay home have already sacrificed a second income in order to stay home. To the extent that these mothers interrupt careers, they also increase their economic dependency and their vulnerability. Some will end up as single parents, and most of them will end up poor under the current government support systems.

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Let's recognize a second point, that returning to the paid labour force is the preferred option for many women. They should not face the high marginal tax rates that penalize the decision to re-enter the labour force.

There's a tension between these two objectives—supporting women who wish to stay home and not trapping them in the home, actually facilitating re-entry to the labour force.

I sent you a handout a few days ago. I think you each have a copy. I want to turn to that for a minute.

Page 2 of the handout is entitled “What Government said in Geneva about Canada”. I'm not going to read it. You can read it at your leisure. I'm just using it in presentations because these quotes are from a presentation by HRDC officials to the UN in Geneva about the social programs in Canada. Many of you, when you read it, will not recognize Canada. It's just an outrageous selection of quotes.

If you go to the next page, there's a simple graph there. It shows the income distribution of couples with children. The data is from 1994. It's not the most recent data available, but it's the most recent I had readily available with a couple of days' notice. It simply shows that the income distribution of couples with two earners is higher than the income distribution of one-earner couples. It shouldn't be a terribly earth-shattering finding.

If you go to the page after that, though, I think there's a more important point to be made. This is the page with two graphs. The upper graph shows a series of bars. Those bars vary by the husband's income. So I've used only the income of the husband in the family.

In families where the husband earns—if I use the second bar—$10,000 to $20,000, about one-third of the spouses, the wives, don't work; about one-third work part of the year; and about one-third work full time, full year.

The important point about this is that as the husband's income changes, that proportion doesn't change very much. In about one-third of families, she works full time, full year; in about one-third, she works part of the year or part time; and in about one-third of the families, she does not work. His income has almost no effect on her decision about how she's going to work.

The bottom half of that page shows another graph that tells essentially the same story a different way. It's the income distribution of husbands' incomes in families where the women are working full time, part time, or not at all.

I present these because you do occasionally hear the comment about women staying home that they are privileged, married to professionals. I don't think these data support that view. We hear occasionally about women staying home if they can afford to do so. Again, the husband's income makes very little difference between those types of families. That's why I presented that.

Let me turn now to the one-earner, two-earner treatment. There is, I think, an appropriate tax distinction between one-earner and two-earner families. In a fair tax system, one-earner families would pay somewhat more tax than two-earner families because of the employment-related expenses and also because of the leisure time for the one-earner family. How much of a distinction? That's a matter of judgment. I don't think there's any physics here to tell you what the right number is, but there are some facts that are certainly quite clear, and there should be no dispute.

Bracket creep and the recent tax cuts have increased the spread between the tax treatment of one-earner and two-earner families. So to the extent that there's an appropriate distinction, the tax treatment is increasing.

The tax cuts we've had in the last couple of budgets have differentially benefited two-earner families, and there's been little or nothing in the budgets over the last several years to differentially benefit one-earner families. Essentially, we've had increases in the child care expense deduction, we've had some tax cuts, and I don't think we've had anything you could look at and say, yes, this is a support for one-earner families.

Let's talk about a couple of components of the tax system. First, the child tax benefit is income tested on a family income basis. Basically, it treats one-earner and two-earner families the same, but it's eliminated for families with incomes over $70,000. For virtually all families with children, the support levels are much lower now than they were 15 years ago. Effectively, the child tax benefit is the only tax recognition for families, and it's certainly much lower than it used to be, eliminated for families with incomes over $70,000.

The child care expense deduction recognizes child care costs. I think it should remain a deduction. Unless anybody wants to ask a question about it, I'll just leave it at that.

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The current system allows two-earner couples to deduct some costs that aren't strictly employment related. I'm thinking about hockey camps, riding camps, and summer vacations, which one-earner couples can't deduct.

We have a range of public funds being used for maternity benefits. Public sector employees are often lucky enough to get 93% replacement on their earnings, with no two-week waiting period. Now, that's choice. The people without that type of employer benefit get 55% of benefits under UI, if they qualify.

Contract employees, self-employed people sitting at a desk? No benefits. At home because you're unemployed or because you're taking care of a previous child? No benefits.

The Canada Pension Plan basically pays seniors by taxing the working age population. Effectively, my benefits are going to come from the taxation of my children. It's not like RRSPs, where I'm investing my own money and then getting it later. Entitlement to CPP is based on attachment to the paid labour force. It's not based on raising children. A two-earner couple that raises no children will get two CPP benefits. A one-earner couple where one stayed home to take care of the children gets no recognition in CPP for that.

How do we maximize the choices available to families? I'm going to go through a series of very quick things you could think about. I haven't done any analysis in detail. Many of these have problems, and are not simple solutions, but I want to go through them to try to get some proposals on the table.

Of course we should restore tax fairness for parents. I think we should have a non-refundable credit for kids. If you want families to have the choice to go into the paid labour force, they need a real choice. We have to have a child care program that's accessible, of good quality, and all of those associated things.

How do we reduce the economic vulnerability of women who choose to stay home? We could look at the spousal credit. The tax form has a spousal credit that now increases the take-home pay of the working spouse. You could turn that into a refundable credit somehow. You could mail a cheque to the stay-at-home spouse rather than giving an increase in the take-home pay of the spouse in the labour market.

In terms of maternity benefits, you can protect jobs. I understand that for postal workers, the job is protected for five years. We could have legislation to require more protection of jobs.

In terms of EI benefits for maternity benefits, first of all, we know it's much harder now to be eligible for EI and maternity benefits than it was a few years ago, but why is there a two-week waiting period to receive EI benefits for maternity? Why is there a deductible? What's the purpose of this?

Why, when a woman who has been staying home to raise children goes back into the labour force, is she treated by EI as a re-entrant, with those huge first-year requirements? This is not a re-entrant. It's not like a student going into the labour force for the first time. It's virtually impossible to be eligible for EI benefits, except for working full time for a full year, if you're a re-entrant. So if somebody is going back into the labour force after raising children, why not treat them as another EI recipient, not a re-entrant?

We used to have income averaging in this country. For a woman who made $30,000 or $40,000 a year and who then left the labour market to stay home, it's quite reasonable to say, look, over the last five years your average income wasn't $40,000, it was $10,000. So the first two or three years, when someone is at home and their income has dropped to near zero, you could actually refund some of the taxes they paid when they were in the labour force. Again, there are problems with that, but we can look at ways of doing that.

Other countries entitle some CPP retirement benefits for the time at home. What about the costs of raising children? The child tax benefit has a $213 top-up for people who don't have receipted child care expenses. This is used by both one-earner and two-earner families. It's used by one-earner families who aren't using child care and it's used by two-earner families where the child care is not receipted.

So it's $213 versus $7,000 for the child care expense deduction. I think you could increase the $213 if you chose to. It's income tested because it's part of the child tax benefit, and it would benefit both one-earner and two-earner couples who don't have receipted child care.

With regard to a tax credit for nursery school, when I say nursery school I don't mean child care. Nursery schools are those programs that could be two or three half-days a week, often for women who are staying home so the kids aren't just locked up with mom all the time.

We allow an education deduction. When I got my pilot's licence I got an education deduction for those tuition fees. I don't see it's a huge violation of the integrity of the tax system to allow a tax credit for nursery school.

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Mr. Szabo's idea of allowing up to $25,000 of income splitting is intriguing. I like it because it allows some CPP credit for the stay-at-home mother; she will get CPP contributions for it. I also like it because virtually every self-employed person in this country is told by their accountant the value of income splitting. I don't know if there is a dentist in the country whose wife isn't on the payroll. So we're not doing something we don't already allow for a large number of people.

What I don't like about it is that it doesn't do much for the low-income two-earner couples, because you basically have to have somebody in the higher tax brackets to get any value out of it.

So we could look at doing things like that.

That completes my presentation.

The Chair: Thank you, Mr. Shillington.

[Translation]

Mr. Cardin, I would invite you to ask the first questions.

Mr. Serge Cardin (Sherbrooke, BQ): Thank you, Mr. Chairman. It is regrettable that the two witnesses have not filed documents that could have allowed us to better follow their submissions. We do not always have the time to jot down all the comments which catch our interest. However, I would like to thank you for your submissions which proved very interesting and brought to our attention a relatively large number of questions.

I would like to make a suggestion and hear your opinion. I think we all agree that the basic exemption for individuals and spouses should be adjusted. We may also want to think about creating exemptions for children according to their age and the real costs that must be borne by the parents throughout the various stages of their children's life. Among other things, the childcare expenses and other factors would be taken into account in order to calculate what the real costs are in real life. What do you think?

[English]

Prof. Frances Woolley: Sorry, but I think the translation is a little difficult. Are you asking about introducing a child tax exemption adjusted to the age of the children?

[Translation]

Mr. Serge Cardin: Yes, we would create a basic exemption based on the age of the children and the actual costs which the family must incur throughout the various steps of a child's life. We would also take into account the fact that one or both spouses work or whether it is a single-parent family. Eventually, these exemptions could even result in negative income tax. We would keep running a parallel tax benefits program. Families with the lowest income could benefit from these exemptions based on the actual cost of life and the age of the children.

[English]

Prof. Frances Woolley: When you're talking about tax exemptions, one possibility is to have a deduction and the other is to have a credit. My view is that a credit is preferable to a deduction because deductions are worth more at higher-income levels. That would bring it in line with the basic exemption and the spousal exemption. So I would say we should put it in there as a non-refundable credit.

If you have an exemption that's tied to the real costs of raising children, I think you have a big problem in that rich people spend a lot more on their kids than poor people. They spend more on clothes. They spend more on food. They spend more on everything. So tying it to the amount that families spend on their children is going to compromise the progressivity of the tax system. What I think makes more sense is tying it to a minimal cost of raising children.

Ken Battle has estimated that at about $4,000 a year. He's advocated introducing a basic income guarantee of $4,000 per child per year.

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I certainly have some sympathy with that approach. It would be expensive, and it would be difficult. It would be very costly. But if you're looking at the cost....

Actually, Richard and I are quite similar in our thinking. I've advocated at other times essentially making the spousal credit refundable and making the child benefit universal. That would be a basic income guarantee to everybody of about $1,600 to $1,700 a year.

Some people at the C.D. Howe Institute have costed out that proposal, at least the child component of it, and they figure it's $6 billion. So if you're figuring even that, which is much less than the cost of raising children, it's going to cost you $6 billion. Actually reflecting the real cost of raising children is going to be too costly to do.

Does that answer your question?

[Translation]

Mr. Serge Cardin: Are you in favour of a universal tax benefit to which all families would be entitled, regardless of their income?

[English]

Prof. Frances Woolley: Yes.

[Translation]

Mr. Serge Cardin: If we consider the principle that the purpose of income tax is to distribute wealth, how can we talk about universality at that level?

[English]

Prof. Frances Woolley: I think the basic point is to compare families with and without children at a given income level. If you look at, say, a family earning $70,000, a family with children may well pay exactly the same taxes as a family without children, but if you adjust for the cost of raising children, using what economists call an “equivalence scale”, a family with two kids has a real income more like $43,000 compared with the $70,000.

If you're comparing the two, a couple with two kids and $70,000 is equivalent, economists figure, to no kids and $43,000. If you then make those two, with and without kids, pay the same taxes, you're really compromising the horizontal equity of the system.

I think that's why this committee is here. A heck of a lot of families out there in Vancouver and Toronto are earning $70,000 and figuring they're doing well—shopping at Value Village.

[Translation]

The Chairman: No further questions?

[English]

Yes, Mr. Shillington.

Mr. Richard Shillington: You mentioned indexation. Certainly one of the reasons taxes have increased so much for low-income Canadians is the decision in 1986 to use indexation to increase taxes. It was known at the time, and it's been known since, that by using indexation and bracket creep to increase taxes, it's regressive, because the burden would increase most for people at the lowest income.

It's not only regressive; it also has ensured that families with children would bear the brunt of indexation more than families without children, because on top of all the other tax increases all families have, families with children had the loss of the child tax benefit and the child tax deductions—when they existed—because those were being de-indexed as well.

In fact, the indexation has increased the tax burden of one-earner families more than two-earner families, again because the bracket creep is affecting the one-earner families more severely. So certainly, I don't think there's anybody, other than government ministers, who is opposed to indexing the tax system...everybody's opposed to it except...who happens to be minister of the day.

In terms of the tax credit for children, varying by age, certainly you get the impression that the cost of children goes up by the age, but I would look at that very carefully. I'm not sure how much it does. Younger children probably require less out-of-pocket expense, I'm thinking, but have more impact on the family in terms of earning power. A younger child may cost less for diapers and clothing, but affects the earning power of the family because of the child care responsibility. So it may be that if you factor that in, younger children in fact cost more than older children. The types of cost change as they get older.

Certainly if you have a child who's 20 years old, in post-secondary education, they cost far more than an infant, and there's virtually no tax recognition for that, for the tuition.

Mr. Paul Szabo: RESPs, government grant, 20%....

Mr. Richard Shillington: Well, it was a little late for me.

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Also, I don't know what proportion of families with children are using RESPs, but it's not going to do much for modest-income families. I think we know that.

The Chair: Thank you.

Mr. Herron, do you have any questions?

Mr. John Herron (Fundy—Royal, PC): Yes.

Ms. Woolley made a comment that there was a conscious effort by the taxation system to take money away from one set of families to give it to another set of families. I think that's the way she phrased it.

I'm not as convinced that this has to be a matter of a zero-sum game. I think what the issue ultimately comes down to is providing as much resources as we can to the raising of our children in that regard.

That's my first comment or question.

Prof. Frances Woolley: If there's one thing I would urge this committee to come out with, it would be to recognize that this is not a zero-sum game.

When the child tax benefit was introduced, what happened, essentially, was that there was a decision that the envelope was going to be fixed, and the money was shuffled around within the envelope. I think now, if we're going to do any further improvements to the child tax system, it has to come out of bringing more money into the envelope.

Mr. John Herron: Okay.

You referenced the experience they're undergoing in the U.K. in terms of payments to mothers—or primary caregivers.... I think would probably be a better phrase in that regard. Can you expand on that system a little bit for us?

Prof. Frances Woolley: Essentially, the changes happened some time ago. What economists can do is to look and say, okay, this is what the spending patterns were before the change in the mid-1980s. Then they looked at the spending patterns after the change.

Essentially the change involved taking the deduction for dependent children—so it was an exemption for dependent children—and removing it, instead giving a cash benefit to mothers. It was a little bit like the introduction of child benefit in that the child benefit also took money out of the child amount and gave it into a cash transfer, but it was a universal transfer.

What's happening in Britain right now is that they're actually looking very much at the Canadian system and questioning whether or not they want to continue with a universal program. They're at a different stage in this debate.

Mr. John Herron: Okay.

Thank you, Mr. Chair.

The Chair: Mrs. Redman, please.

Mrs. Karen Redman (Kitchener Centre, Lib.): Thank you, Mr. Chairperson.

When Status of Women came before us, one of the things they talked about and suggested we look at was dependent care, not just child care. I'm wondering if either of you would like to comment on that aspect and how it is treated by the tax system.

Mr. Richard Shillington: I assume they were talking about, for example, the spousal credit, that it would only be available for women who are at home caring for children rather than women who are at home regardless.

Is that the issue?

Mrs. Karen Redman: No, I think the intent was that dependent care could be for any family member, for an aging parent or for a disabled member of the family.

Mr. Richard Shillington: Sure.

If you go back to the first principles, the tax system should tax on ability to pay or standard of living. If a family with whatever income is taking on the additional burden of caring for someone, their standard of living is lower than that of a family that has that income and is not caring for those children.

I think a fair tax system would recognize that. So, yes, you would expand it to include basically any care of dependents.

Prof. Frances Woolley: I'm glad you raised this, because I think this is something that's going to be increasingly important as the population ages. It sure as heck makes sense for the government if you can persuade people to look after dependents at home rather than institutionalizing them.

For example, for families with disabled adult children, if you can provide enough support to allow families to keep those children at home, it costs thousands of dollars less than institutional care.

So I think this is a good idea. The question is, can you do it through the income tax system?

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The difficulty I see is identifying people who are really, truly dependent as opposed to just, say, a member of the extended family who happens to be living in the same house. If it's difficult to identify people who are really, truly dependent, that would argue for some social-services-type delivery of the payments.

But, yes, absolutely.

Mrs. Karen Redman: One of the suggestions made by Mr. Shillington, I believe, was that of looking at several other avenues that are open to the government, such as CPP and EI.

Do you have any costings for any of those?

Mr. Richard Shillington: No, I don't. I do this work essentially as a hobby.

I would hate to do our friends at HRDC or Finance out of a job, so I would suggest you turn to them.

You might have something to add.

Prof. Frances Woolley: I don't have any numbers either, but one thing you might ask your researchers to look at is the Saskatchewan experiment. Saskatchewan does have a homemakers' pension, and has had it for some time. It essentially allows homemakers to contribute to CPP. That would be something to look at.

My feeling is that if you look at the expected benefits you get from CPP contributions, most people in their 20s or 30s would not want to contribute to the plan if you look at the expected return they're going to get from it.

Mrs. Karen Redman: I have to compliment Mr. Shillington. I really appreciate the handout that outlines the one-third distribution among families. It seems to not be dependent on their income bracket. I think often it becomes an urban myth or a truism, and it's nice to see that's not necessarily the case.

I had other questions. May I come back?

The Chair: All right.

Ms. Dockrill.

Ms. Michelle Dockrill (Bras d'Or—Cape Breton, NDP): I have one specific question for Richard.

You talked about the fact that the child care expense deduction should remain a deduction and not a credit. I wonder if you can elaborate on that.

My second question for both of you is that one of the criticisms, certainly, that I hear about the child tax benefit is that a family on social assistance has that benefit clawed back by the province and, therefore, the benefit is not in fact reaching the poorest children in the country.

Do you feel that addressing this problem is a priority, and if so, how do you feel we should address it?

Mr. Richard Shillington: I guess I'll go first.

On the child care expense deduction, I think most progressive voices have pretty quickly said it should be a credit. The editorial pages of The Globe and Mail have several times also said it should be a credit, which should be a warning.

Voices: Oh, oh.

Mr. Richard Shillington: I don't think it should be a credit because I don't think it's a social policy as much as a tax policy. If you think of the child care expenses as being employment-related, anybody running a small business can deduct the cost of rent and printing and things like that. You get taxed on your net income, not your gross revenue.

So if someone has to pay $5,000 to earn $10,000, I don't think it's unfair to tax them only on their income after the expense is incurred to earn that income. If somebody is paying a 50% tax rate on the income that was enabled by the child care, I don't think it's unfair to allow the child care to be a deduction, because the income that was enabled was taxed at a high rate.

The other reason for wanting to keep it in the tax system and out of social policy.... Some of you will remember Barbara Greene's committee. She recommended the child care expense deduction become a credit and that it be income tested. My fear is that as soon as it becomes income tested, it's not seen as tax recognition any more; it becomes social support, and therefore we should income test it. Why would we be providing tax support for child care payments for rich people?

This is exactly what's happened with the child benefit. We combined tax policy with anti-poverty programs and we ended up with an awful anti-poverty program. That's why I would keep the child care expense deduction as a deduction and in the tax system, not as a social support.

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There's not nearly enough time here to talk about all the reasons the child tax benefit should not be clawed back from social assistance recipients. I've written several pieces. I'll happily send you copies of the various pieces I've written about that. We now have the UN on our side.

We have a program that's supposed to be the best anti-poverty program ever, where 17% of single parents are getting a value from it in income support, and one-third of poor families. That's from the National Council of Welfare.

We are clawing back support from on-reserve aboriginals. In the government's mind, I gather, the reason aboriginals haven't flocked to the available jobs is that welfare on the reserves is just too generous. I think it's a despicable program to the extent.... I overstated that. The child benefit could be part of a really good program, but as itself, as the only thing...and clawing it back, it's distasteful.

Prof. Frances Woolley: I think the question you raised about the child benefit as part of the anti-poverty.... It's a very difficult program. I'll be talking to the assistant deputy ministers next week about that. We'll probably have more to say then.

One thing I would like to draw your attention to, though, is the timing issue. What we do know is that people who are on welfare go in and out of the labour market. They get a job, they lose it. They get a job, they lose it.

In that context, it's very difficult to use child tax benefits to relieve poverty, because the benefits don't increase until up to 18 months after changes in income.

Let's say you have a family income of $30,000 a year and you're getting a lot of your child tax benefit taxed back. If you suddenly lose that job and go into poverty, you don't get any increases in your child tax benefit for at least 6 months, up to 18 months. This is the problem.

Ms. Michelle Dockrill: On that point, the concern for me is exactly that we're talking about a child tax benefit, and when we acknowledge that there is a segment of the population out there—i.e., families on welfare who are not receiving that benefit—I have some concern with it being called a child tax benefit.

I've asked this question to a couple of the presenters, and I'm going to throw it out again. Tell me whether you agree or disagree.

The first page in the presentation from Status of Women officials talked about dependent care being the key issue and how families can meet income and care needs. Certainly I think it's our responsibility to support families in that, but one of the interesting statements they made following that was that the answers may not all be in the tax system.

My question was, what role did they feel the national child care or a national home care program would play in addressing those issues? I want to know if you guys want to comment on that as well.

Prof. Frances Woolley: I have a couple of things. The Quebec experiment with $5-a-day child care is, I think, something to watch, to see what it will do. The other thing is that we know that if you decrease the cost of child care, more women participate in the labour force. Will it make a difference to women's labour force participation? Yes, it will.

Mr. Richard Shillington: If we had a basic tax recognition for children, reintroduced horizontal equity, and indexed the system, I don't think we'd be too far from treating one-earner and two-earner families fairly. But I do think there are a lot of things we should be doing. I went through a whole long list, and most of them were not in tax. There are many things we could do in EI and CPP and other places, which would go toward assisting and protecting stay-at-home moms from economic vulnerability. Most of them aren't in the tax system.

The Chair: Thank you.

I'd like to now ask Mr. Szabo to conclude with his questions.

Mr. Paul Szabo: Thank you.

I enjoyed both your interventions. I think you've touched on a lot of issues that we have to amplify upon.

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Let me get down to the issue of whether the child care expense deduction is an employment expense or a social benefit. I believe it is an issue that we have to deal with, because it in fact would force us to more fully define an employment expense and try to reconcile why a host of other things are not deductible as well.

Do you have an opinion as to whether or not we should in fact consider assistance to families who choose to have children a social benefit or an employment expense—if you want to be inclusive?

Mr. Richard Shillington: Both. I think children affect the family's ability to pay tax. They affect their standard of living. Therefore, if the tax system reflects the ability to pay, children will affect the family's tax burden.

As well, we use the tax system and the transfer system as an instrument for other social goals—anti-poverty goals and support. The fact that we have tax recognition doesn't preclude a child tax benefit that's targeted to low-income families, so you do both.

We used to have an employment expense deduction as part of our tax system—I think it disappeared in 1984 or 1985—that was the lesser of $500 or 20% of earned income, if I remember correctly.

So there is a recognition that to the extent you have to spend money to earn money, a fair tax system exempts that. In fact, many people, or employees, have an office in the home. They're in fact employees, but they still can get, under certain circumstances, recognition.

The same goes for travel expenses. If you want to say to families who pay for child care, “we don't think that is an employment-related expense”, then it seems to me you must also say to the travelling salesman, “your gas costs are not an employment-related expense”. I mean, other people have to pay for the cost of getting to and from their offices.

I think you're familiar with the Symes case. She had a point.

I saw in a newspaper article yesterday that one of the local firms, JDS Fitel, I think, is building a daycare centre in their office building. I assume they can deduct the cost of that construction as a business expense.

Now, if a self-employed person, such as Symes, said they were now going to build a daycare centre in the corner of their office for their child, I assume Revenue Canada would say, no, they can't deduct it.

I don't understand that distinction.

Mr. Paul Szabo: Okay.

In your conversation you mentioned that the expenses of raising a child would increase as they get older. Certainly they have more expensive toys and clothes and other activities, etc., but one of the issues I'm wrestling with in terms of a policy direction is whether or not the taxpayers of Canada favour supporting families with children, driven by their wish to have better outcomes for children, so that in fact our investment in children in the early years gives us better outcomes and therefore saves us, over the long term, in terms of health, social programs, criminal justice, and education costs, if you get good....

So the return on investment, based on all of the research, is far better in year one, year two, year three, than it would be for the rest of the child's life, even if they're in post-secondary.

Should the premise be, then, that taxpayers are subsidizing families who have children not just because they incur expenses? Is it that taxpayers recognize that if we do things to create an environment that provides optimal choices, flexibility, and options for parents, the best possible care arrangements are going to be found by the parents and that the consequence of that is the probability of getting better outcomes for children?

Prof. Frances Woolley: Shelley Phipps has just written an extremely informative study. It has been published by CPRN. She has addressed exactly this question: what policies have the best effect on child outcomes?

She compares Canada, the U.S., the U.K., and Norway. She finds that universal benefits paid to families with children seem to be the best predictor of good child outcomes.

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I'd really suggest that you take a look at that.

The Chair: She's going to be appearing before the committee, Mr. Szabo, so you might want to reserve some of those questions for her.

Mr. Shillington.

Mr. Richard Shillington: I'm probably really stubborn about this, but I do try to keep a distinction between tax policy and social policy.

The tax policy allows people a personal credit without evaluating the value of what they're doing. The first $7,000 of your income is tax free. In fact, Revenue Canada says even if your income is obtained illegally, you are required to file a tax return. They are not evaluating when you're contributing to society. They simply say, “This is your income.” I don't think the tax system should be evaluating what people are doing.

Children affect the ability to pay. There should be a tax recognition for that.

The social policy side of me says that certainly we want to encourage families to do responsible things. Society benefits from that in the long run. There's another good reason for doing it, but that's separate, to my mind, from the tax issue.

I'm ashamed—I'll take just 30 seconds to say this—of the extent to which this society, over the last 15 years, has been privatizing all the costs of parenting. We now have municipalities charging soccer teams for renting fields. In the schools, we are privatizing all the costs of parenting, not only making parents responsible and reducing their authority but also making them liable for when their children go off the tracks.

At the same time, society is expropriating the benefits of having children. We are running Old Age Security and CPP and our health care system on the basis that when those children get old enough, we're going to tax them to pay for our benefits.

So we're privatizing the costs and expropriating the benefits, to my mind.

Mr. Paul Szabo: The issue of tax versus social is an interesting discussion, but I'd like to give you a quotation that we heard just this morning from officials of the finance department. After making reference to reducing child poverty, the statement was, children are always better off when both parents join the workforce. This was from the Department of Finance. I'll read that again for you: children are always better off when both parents join the workforce.

It appears that there is a social judgment being made with regard to finance policy. It's something that is systemic. It's built in there.

To both of you, do you believe our policy should neither compel nor penalize parents for their choices of caregiving—i.e., that we should not be in the business of social engineering?

Mr. Richard Shillington: I want time to think about this one first.

Prof. Frances Woolley: Well, I think that raises a question, namely, what kind of tax system doesn't affect parents' choices? Arguably, a wholly individually based tax system with child care expense deductions is one that is neutral with regard to parents' choices.

So while people may agree on the end, I think people will disagree fundamentally on the means of achieving that.

I would make some other points. I disagree with the distinction between social and tax policy. I think if we're looking at it in terms of economic efficiency, what we need to look at is the way in which the tax and benefit systems impact together on people's decisions. So it doesn't really matter; if going into the labour force means you lose $20 of benefits for every $100 you earn, that has exactly the same effect, in terms of people's decisions, as having to pay another $20 in taxes.

So focusing on a distinction between tax policy and social policy really hinders clear thinking on these issues.

Mr. Richard Shillington: I'm certainly not the best qualified to respond to the finance department's assertion, but certainly their assertion that children will always be better off when both parents work is the underpinning of the child tax benefit and the tearing down of the welfare wall.

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To me, the response is simplest in terms of single parents. For a single parent with a child under the age of one, I just find it hard to be able have the confidence—the chutzpah, really—to say that the child is going to be best off if it's dropped off at daycare at sunrise, the mother flips hamburgers for eight hours, comes back to pick the child up, and goes home, living on a minimum wage income, compared with a mother staying home.

There might be examples where it's true, if she's a professional and she can earn a substantial income, but certainly if her opportunity cost is small, I can't speak for that family and say they're better off that way.

Mr. Paul Szabo: Okay.

On the income-splitting thing, that was one of the first bills I had in Parliament, back in 1994. I know better now that there is no single solution to a complex problem. There has to be a number of elements.

In fact, I'm not supportive right now of an income-splitting regime because it's not sufficiently inclusive of, for instance, a lone-parent scenario unless you assume that a child could be the equivalent to spouse and you could split one income with somebody who has no income. I mean, there are ways to do it.

It does have, however, some benefits if you could somehow attach it to the EI and CPP systems so that you could get some imputed attachment to the paid labour force—i.e., recognize unpaid work by giving, for instance, some mechanism for participation in the CPP system and maybe in the EI system. There is this problem of going in and out of the paid labour force when families are having children.

I did want to ask you about this question of keeping the child care expense deduction as a deduction. If you have a scenario where a lone parent....and you use “single parent”, but I don't like that terminology, because to me, a single parent is never married or equivalent to married, while “lone parent” means that there is one parent in the household.

If there is no income or if it's just social benefits, anything you do with the tax act has no benefit. There's no way to attach to those who are probably in most need.

My current thinking is that we have to look outside of the Income Tax Act so that you can say, okay, the issue here is children, and if I can get my dollars direct to a caregiver, and if I respect the parents' integrity to choose the best possible arrangement, and understand that if Grandma lives across the street, I could go to work, because I have one of the most perfect caregivers you could ever have.... If I live in rural Canada and there are all kinds of benefits for subsidized or national child care, but there is none in my community because I'm in rural Canada and it's not affordable or accessible, I don't even have that choice.

So the only real way for me, as far as I can see, to be fair and inclusive to all families is to direct the benefit to the caregiver—i.e., don't go through the tax system and give it to a spouse when you file a tax return. Do it outside the tax act so that you can get a monthly or weekly benefit paid directly to a caregiver to match revenue with expenses.

I guess my thinking on this thing is that it's the only way I can take care of those who are income challenged. I have to find a way to put real dollars into the pockets of caregivers who are charged with the responsibility, particularly during those formative years, of ensuring that kids have the best possible chance of having healthy outcomes.

So I'm looking—and my preference is—outside the tax act and also at considering things such as, under EI, extending parental leave from the current 10 weeks, optional, to an additional 27 weeks, so that parents would have the option, with the maternity benefits, to have one full year, the first full year of a child's life, to have direct parental care if they so choose.

Secondly, it's also to deal with this issue we have never been able to come to grips with, namely, unpaid work. We've included it in the census, but I've never heard anybody come up with a way of how to recognize, at least in some modicum of means, that there is a value to that work.

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One of the things that I think would be very dramatic would be to find a way to link unpaid work to the CPP system, to say that you are working. It may be unpaid work, but I'm going to give you a chance—whether it be through a nominal contribution to the plan—to be able to earn pension benefits, because work is work, and it deserves to have an opportunity to earn a pension benefit.

Having said all that, I'd welcome your comments.

Mr. Richard Shillington: You talked about lone parents. For many of them, their biggest need is income, and the tax system is designed for taxing incomes. Yes, you're going to look for ways outside of that.

You mentioned parental benefits. I'm going to use the opportunity to give one more kick at this cat. We have a two-week waiting period for maternity benefits. If the woman receiving maternity benefits continues on, and receives parental benefits in her name, there's not a second two-week waiting period. If instead her spouse takes over the at-home responsibility and receives parental benefits, there's a second two-week waiting period.

If there's a family where the husband is in a position where he could take over and stay home, the family is essentially going to look at losing maybe $500 or $800 in order to take this option.

Don't we really want to encourage this to happen? Why do we have a second two-week waiting period? It's just silly.

That's all I really wanted to say.

The Chair: Do they actually lose this money or is it just delayed and the benefit period prolonged?

Mr. Richard Shillington: If she continues to receive the benefits, then there will be no two-week period without benefits. She'll just tack it right on and collect. If they switch the beneficiary to him, they'll go for two weeks with no support, and then he will start receiving his support.

The Chair: But if the benefit period was for x weeks, do you get x minus two weeks or do you still get x weeks?

Mr. Richard Shillington: I'm not sure, but I think you still get x weeks. So it's not a matter of getting less money, it's getting...which is the same thing, because you're going to go two weeks without money, and at the end—

The Chair: You're going to get two extra weeks.

Mr. Richard Shillington: —you can go back to work two weeks earlier.

Now, if you don't want to spend more money, eliminate the two-week waiting period and just move the benefits up. You can either increase the benefit period by two weeks to cover the waiting period or you can just remove it.

The Chair: But in the case of choosing the maternity benefit, can you not just make your decision two weeks prior to the date you actually want to receive the money?

Mr. Richard Shillington: I'm not sure I'm with you.

Mr. Paul Szabo: Perhaps I could conclude with a quote.

Oh, sorry, Dr. Woolley. Go ahead.

Prof. Frances Woolley: I have some responses to some of the points you raised. I think to a certain extent the solution for this committee is a no-brainer. If you want to help families with dependent children, well, give money to dependent children. That would tend to argue for universal benefits.

You mentioned giving families choices. A lot of families, I think, would choose to have a parent stay home with the children for a fairly short period of time when the children are small and then go back to full-time work or part-time work of good quality. That's a choice a lot of families would want to have.

The question is, how do we get that choice? Richard has talked about income averaging, which is a very good idea. There are also reforms to employment insurance to allow women to access training programs, to get back into the labour force that way. There's also the timing of child tax benefit, so that if a woman decides to stay home when her kids are small it doesn't take a year before the loss of family income is reflected in child tax benefit programs.

In terms of your comments about unpaid work, if unpaid work has value, then logically we should do to it what we do to every other kind of productive activity in the economy, from building bridges to building houses to writing reports. Every productive activity in this economy is taxed as part of the income tax system. If unpaid work has value, then logically we should include it in the comprehensive income tax base.

Mr. Paul Szabo: We're going to be pursuing, I'm sure, this whole issue of social benefit versus employment expense, but I believe it's reflected in a quote I can give you from the Minister of Finance in 1994, when he addressed the finance committee on the state of the union, his first full-blown state of the union address. He said that “good economic policy and good social policy are one and the same”. He said that good social policy makes good fiscal policy and good fiscal policy makes good social policy.

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I have a feeling that when it gets down to it, there will be no disagreement with people like Dr. Fraser Mustard and others that the first years of life are the best investment years, and that's where we really need all the options. As Dr. Woolley points out, when the family is comfortable that they have appropriate care arrangements, etc., they then can transition to reintegrate into the labour force if that's their choice, if they're not having more children, and so on.

This idea of the EI benefits in terms of there being perhaps some disqualification, and the re-entry thing, I think that's a very valid point. If you're in the family-bearing years, you shouldn't be penalized because you didn't get back into the labour force quickly enough just to get in your 700 hours.

For me, that sounds like something we have to look at so that we in fact promote this flexibility and these choices for families.

I thank both of you. I think you've been excellent for the committee.

The Chair: Thank you, Mr. Szabo.

I have one quick question, Professor Woolley. In your concluding remarks, you state that the worst way of helping families with children is joint taxation, and yet we had finance department officials say that if we did income splitting, which I presume is the same as joint taxation, they believe that allowing each spouse to split combined family income in half for tax purposes would eliminate the supposed discrimination between single-earner and dual-earner families.

You say it's one of the worst ways of doing it. Why? I'd like you to comment on that.

Prof. Frances Woolley: Would it eliminate discrimination between single-earner families and dual-earner families? Yes. Would it cost a lot of money? Yes. What percentage of that...?

What I'm talking about is that income splitting would be an expensive proposition for the government. Really, the question is, how much of the tax savings created by income splitting would go to families with children? I don't have the resources the finance department has—

The Chair: Their estimate is that it would cost the government $4 billion.

Prof. Frances Woolley: Okay. Did they give you an estimate as to what percentage of that $4 billion would go to families with children?

The Chair: They didn't, but—

Mr. Paul Szabo: Actually—

Prof. Frances Woolley: You see, if you took the child benefit of $1,020 per year and universalized it so that it went to every family with children in the country, that would also cost about $4 billion, and every single penny would go to families with children.

Income splitting? I don't know, because I haven't done it, but in my ballpark estimate, I would be very surprised if even half of the tax savings went to families with children.

Mr. Paul Szabo: Actually, the $4 billion was with regard to income splitting being permitted for families with children. So in fact $4 billion is all for families with children.

The point you made earlier bears repeating, that income splitting benefits only families that are at higher than the lowest marginal rate. In fact, it would benefit middle- and higher-income earners and have no benefit whatsoever to low-income earners. So it's not the full solution.

Prof. Frances Woolley: If you're seriously thinking about income splitting, I'd recommend taking a look at the family quotient system that's used in France. It allows income splitting between parents and children. So income splitting, sure, but why between adults? Allow income splitting between parents and children.

The Chair: What we're trying to do is address the perceived inequities between single-earner families and dual-earner families. One of the ideas floating around is that we allow income splitting at that level. Then you would eliminate the tax differential, obviously.

But you're saying that's not your preferred—

Prof. Frances Woolley: I'll tell you something. Let's think about a man who has a good union job. Maybe he's working at a steel mill or something like that. He has a good union job and is earning, say, $60,000 a year. Let's suppose their company is taken over. It's de-unionized. Now they're offered the same jobs at $30,000 a year. They've gone from earning $60,000 to $30,000. They can't pay the mortgage. The wife goes into the workforce, works part-time, and also earns $30,000.

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Their money income hasn't changed, but I'll bet they feel a lot worse off. If you tax those two families the same way, you neglect the reality that it's much better to be able to earn $60,000 having just one person working than it is to have two people working full-time to earn $60,000.

The Chair: Okay.

I would echo Mr. Szabo's comments on the presentation from both of you. That was well done, and very informative. We thank you again.

Thank you, colleagues. We are adjourned until 3.30 p.m.