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]

Tuesday, May 25, 1999

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[English]

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

I'm pleased this afternoon to welcome from Canada Family Action Coalition, its national affairs director, Mr. Peter Stock; from the Evangelical Fellowship of Canada, its director of national affairs, Mr. Bruce Clemenger; and from the University of Toronto, the professor from the Department of Economics, Mr. Gordon Cleveland; as well as from the Canadian Tax Foundation, its director, Mr. Robin MacKnight.

I apologize. But here we go, we're starting to get some members. They had to walk all the way up from the Hill, so maybe they'll be a little bit late. I would like to welcome our guests this afternoon on behalf of the committee members.

The format we've been following is five to ten minutes' presentation by each group, leaving ample time for questions and comments to follow.

So if I could ask Mr. Stock to begin the presentation, and on behalf of the committee again, welcome.

Mr. Peter Stock (National Affairs Director, Canada Family Action Coalition): Thank you, Mr. Chairman. It's a pleasure to be here today. We're also quite pleased as an organization that the finance committee has decided to take some very valuable time out of its schedule to address an extremely important issue. We're encouraged by these hearings and we're encouraged by what members of Parliament on both sides of the committee have been saying.

The issue for most families from our perspective is one of overtaxation. Canadian families are saying in no uncertain terms that they feel they are overtaxed, and there are a number of reasons why they say this. They may feel that the tax system itself isn't fair, but I think they believe the burden of taxation is quite heavy in Canada and that something can be done about it. They also get upset when they see their hard-earned tax dollars frittered away on projects and subsidies and other things that they're not too keen on.

We saw an example in the House just a few weeks ago. Bubbles Galore, the pornography film, apparently received quite a substantial amount of tax funding. This is the kind of thing Canadian families look at and say, that $60,000 could have been better spent on some things that I care about.

So I'm glad the committee is looking at how we can get taxes down for families and some of the ways we can introduce fairness for those families.

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A little while ago our organization had the opportunity to present the first 100,000 signatures on a petition on the issue of child pornography. Some of the members will remember that from just a few weeks ago. That was about protection and enforcement, and we're of the opinion that government can't solve problems. Child pornography is not something that was created by Parliament, that's for sure. But we know about pedophiles; they prey on the weak. And the first line of defence is not government, of course, but families. So here's another area where if we can get stronger families going in this country, we can protect our kids better from problems like pedophiles, sexual abuse, and child pornography.

One thing I wanted to bring to your attention was poll results. A few years back you might remember the poll in the Year of the Family. This was one of the most comprehensive polls that was done in recent time. There have been similar polls done pretty much every year since that time on issues relating to taxation and the family. One thing this poll did quite clearly indicate—this was, by the way, an Angus Reid poll commissioned by CTV, Bank of Montreal, Maclean's and a number of other organizations—was that 71% of families either have a parent at home right now with dependent children or wish they could. And by the way, we find this polling result quite consistent year to year, right up to the present. I want to emphasize that. The minority may be at home with their dependent children, but of those who are in the workforce, there is another substantial portion who wish they could be at home and who aren't right now. The sum total of that result was that 71% of families either have a parent at home or wish they could have.

We have talked in the past about some of the changes that are needed, and I know you've heard from experts across the board on this. One of the greatest single areas of reform we'd like to see is in the area of the child care expense deduction. We'd like to see that made available to all parents regardless of their child care choice. Right now, that's only available to parents with kids in receiptable day care. The problem with this, of course, is that many people choose child care options that are less formal than receiptable day care. It might be a grandmother; it might be a neighbour; it might be some sort of informal setting where a receipt isn't available. They may be paying some money for babysitting or whatever else, but they're not receiving receipts and therefore the deduction is not available to them.

So we'd like to see that broadened. Parents have child care expenses regardless, and we think it would be fairer, in our view, to extend that deduction to all parents regardless of their child care choices.

The final point here is about how to pay for it. It's a lot of money. If we actually do this, we're talking billions of dollars. Yes, we have a surplus in the federal budget right now—that's one place to look—but there are some other priorities for that money as well. There's debt reduction and there's general tax relief. Where's this money going to come from?

I refer to a study that was done a few years back for one of the members at the committee today on the Liberal side, Mr. Szabo. It was a study where the Library of Parliament tax simulation was used. The question was, what would happen if a small percentage of parents who are currently in the workforce who are currently receiving this deduction left the workforce to go home and care for their kids? If they were able to do this, if the financial benefit of extending this deduction across the board made it possible for them to decide to change their lifestyle, have a parent at home to look after a child, what would be the economic benefit or detriment?

One of the things the study found was that a significant cost reduction would accrue to the federal government and to other governments in the form of savings on things like unemployment insurance and welfare and so on as a result of positions opening up in the labour market that could then be filled by people who are currently unemployed. So it's a question, of course, that we won't know the answer until we actually see that situation occur, but it's quite possible there may not be so much cost to the government as a straight-line analysis would portend.

Anyway, we'd like to encourage the committee in its deliberations and encourage you to see what we can do to make taxation fair, and of course lessen the impact of taxation for all families.

Thank you.

The Chairman: Thank you Mr. Stock.

Mr. Clemenger, please.

Mr. Bruce Clemenger (Director, National Affairs, Evangelical Fellowship of Canada): The Evangelical Fellowship of Canada appreciates this opportunity to participate in these discussions on tax equity.

The EFC is an association of some 32 Protestant denominations and other church-related organizations, churches, and individuals. As a faith community, we believe the family is to provide physical, emotional, and spiritual care for its members. The importance of the family is very much in its role to nurture and care for children, and we note that this has also been recognized in laws by government.

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I won't go through our full brief. I submitted copies to the clerk.

A lot of what we talk about is the importance of the family. We reflect a bit on the stressors on family life—financial stresses, chronic shortage of time, and the pressures to fulfil familial responsibilities—and link that often to family breakdown, which is quite socially destructive in Canada and is certainly a large social cost. Then we move on to various federal initiatives that have been proposed, and again we've outlined a few of those, one by Mr. Szabo.

We refer to the Standing Committee on Health, their report Towards Well-Being: Strategies for Healthy Children, and so on. We focus really on two items. One is child care, which I understand you'll be hearing a lot more about in a few minutes, and the tax treatment of families.

In terms of child care, one of the primary tasks of the family is to care for its members, and this includes dependent children. Parents must find ways to care for their children and to financially support them. The decision to have one parent stay at home for children may, and often does, result in significant financial hardship.

According to the Vanier Institute of the Family, single-income, two-parent families experience a higher rate of poverty, 27%, than dual-income, two-parent families. Decisions about child care are crucial, because recent studies indicate that a child's early years are very important for the development of the person. These are critical times for learning, emotional bonding, and mental development. Studies indicate that this early childhood stage of development is best spent under parental care.

Also, polling indicates that Canadians want choice in child care. As child care is such a significant decision in the life of a family, it is important for parents to have real choices about how they will care for their children.

The child care expense deduction offered by the tax system treats raising children as a work-related expense. The expense deduction is only available to working parents. Parenting a child is not the same as transportation or professional development costs for employment. Parenting a child has a financial cost for all families, regardless of the type of child care they choose. So offering real choice to the parents may involve changing the child care expense deduction to a credit, making it available to all families with dependent children.

In terms of the tax treatment of families, the purpose of tax policy is to ensure that people are taxed fairly, that the tax system is equitable and efficient. The tax system is also used as a means of achieving social policy objectives, and it is a legitimate social policy end to seek the well-being of families and children. Given the benefits of raising children in intact, two-parent families, particularly where the parents are married, the government should find ways to encourage and sustain these families and reduce the stressors on families.

One stressor that can be addressed through the tax system is financial stresses. There is a basic difference of taxation of single-income families versus dual-income. When appearing before this committee, officials of the finance department indicated that the difference in tax paid by a single-income family and a dual-income family, each making $60,000, was approximately $6,000. We would ask on what basis then should there be such a large differential between the respective tax burdens of single- and dual-income families?

Perhaps a deeper problem is the way in which the tax system recognizes care for dependents. We note that the tax system treats couples with children essentially the same as couples without children. There is little recognition of the costs of raising children for all families.

Appearing before this committee, the finance department officials stated that in comparing one-income families with an income of $60,000 with two children, and a one-income family with the same income with no children, both paid the same amount in taxes. The only difference was the couple with dependent children received the child tax benefit, which amounted to $713. Needless to say, the cost to families of raising two children is substantially more than $713 annually.

The tax system doesn't take into consideration the costs associated with raising children. As one tax policy expert notes, “the tax system treats the decision to have children no differently from the decision to purchase `a fancy boat”'. Children are not akin to an optional luxury item that parents purchase at will.

While increasing tax benefits for families with dependents would increase the cost for government, I believe this kind of support for families will improve the situation for children, which in turn benefits society. Support for families with dependent children is a preventative action that may lessen family stress and decrease the instance of family breakdown in the short term, and will benefit the children and all society in the long term.

Thank you.

The Chairman: Thank you, Mr. Clemenger.

Professor Cleveland, please.

Professor Gordon Cleveland, Department of Economics, University of Toronto): I think you have copies of the brief. I'm going to read substantial amounts of it. I've organized this into a series of questions. It turns out I will also be addressing some of the issues my friends before me have raised, which will be of interest.

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I am an economist at the University of Toronto at Scarborough, assistant professor and supervisor of studies in the division of management and economics. My research area is the economics of child care and female labour force participation. My previous experiences include being an economist to the special parliamentary committee on child care chaired by MP Shirley Martin back in the mid-1980s.

What are my main concerns? I really have three. I'm concerned that the committee has been led to believe that the child care expense deduction is a special privilege for families who purchase child care services, and this deduction creates a disadvantage for single-earner families relative to two-earner families. In contrast, I believe that the child care expense deduction is a key provision that tends to create equality, that is to say horizontal equity, in the tax treatment of these two types of families.

Second, I'm concerned that the committee has been persuaded that single-earner families are currently overtaxed relative to two-earner families, and the elimination of this disparity is therefore a priority task of tax policy and family policy. I am not persuaded that single-earner families are, in general, overtaxed, and I will address this.

Third, I am concerned that the committee has been persuaded to believe that a universal tax deduction or exemption for children would be the best way to allow the federal government to provide some assistance for all families with children. I believe instead that providing funding for the expansion of preschool services for all children would be a higher priority and a better way to deliver assistance.

The child care expense deduction provides tax fairness, not tax advantage. The child care expense deduction was originally a measure recommended by the Carter Royal Commission on Taxation in the 1960s. It is designed to provide some tax fairness in the treatment of families who purchase child care services, compared to those families that provide child care services for themselves. The child care expense deduction is necessary because parents who stay at home, usually mothers, and produce valuable child care services and other services for their families are not taxed on the value of this production.

Of course it would be very difficult to place an exact value on home production of child care and home production of other services. Nobody, including myself, would therefore recommend taxing the value of home production. However, we cannot fail to notice that the non-taxation of home production creates a major tax advantage for single-earner families. In fact, it's the key point behind the design of the tax system in the way it now treats single-earner and two-earner families.

The child care expense deduction is designed to partially offset this major tax advantage for single-earner families. Since single-earner families pay no taxes on the value of child care produced at home, the child care expense deduction similarly eliminates taxes on the amount of child care expenses that are necessary to allow a mother to work when she enters the paid labour force. Therefore, the child care expense deduction is designed to create equitable treatment in how the tax system handles child care for single-earner and two-earner families.

That's the point about equities. The second point is about whether the first point matters much.

If the child care expense deduction were eliminated, it would amount to a punitive form of tax discrimination against mothers in the paid labour force. The effect, I argue, would be to drive mothers of young children out of the paid labour force. The potential impact of eliminating the child care expense deduction or reducing it is often not appreciated because the commentators generally calculate incorrectly what the effect of this deduction is.

I know this is not a popular thing to do with either my students or you, but let me try to go through a little bit of a calculation as to what the impact of the child care expense deduction is. I'll try to keep it as straightforward as possible.

Let's imagine a mother with one preschool child who has $7,000 worth of annual child care expenses. Assume that this mother, just for simplicity, has a marginal tax rate of 50%. That's a high-income mother. I'm choosing that example only because 50% is an easy number to deal with rather than other numbers. I'll give you more realistic numbers in a minute.

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If there is no child care expense deduction, how much income will this mother have to earn to simply pay for her child care expenses? The answer is she will have to earn an additional $14,000 in order to pay for $7,000 of necessary child care expenses. She earns $14,000, pays half of it in tax—remember it's a 50% marginal tax rate—and then has $7,000 left to pay for child care. With the child care expense deduction, she only has to earn an additional $7,000 to pay for $7,000 worth of necessary child care expenses. Without the child care expense deduction, she'd have to earn an additional $14,000.

I would argue that it's unfair to levy taxes on income that is paying for child care that is required for employment. The income that pays for child care is not truly part of the discretionary income of the household and shouldn't be part of the tax base. The effect of the child care expense deduction is to simply remove this income from the tax base before tax rates are applied.

I promised I'd have somewhat more realistic estimates, so if you have a low-income mother, the cost of that $7,000 worth of child care would be $9,333. In other words the mother would have to earn an additional $9,333, get taxed at a 25% rate and then have $7,000 left to pay for her child care. That's if there were no child care expense deduction. The effect of the expense deduction is to say she only has to pay $7,000 for $7,000 worth of child care. She doesn't have to earn $9,333 to pay for $7,000 of child care. For a middle-income mother, the number would be $11,666 to pay for $7,000 worth of child care.

It may be obvious from the calculations that the child care expense deduction does not lower the price of child care. It is still $7,000. The child care expense deduction forgives the payment of taxes on the income used to purchase child care that facilitates employment. The elimination or reduction of the child care expense deduction would impose very substantial additional burdens on both mothers in two-earner families and single parents. Many mothers would find it no longer worthwhile to be employed in the paid labour force. This would have very substantial consequences for the income of families and for the fiscal situation of governments.

We know, as economists, that the decision of mothers to enter the labour force is one of those decisions that is highly sensitive. There's a high labour supply elasticity. It's a decision that is sensitive to differences in taxes, income, and so on, so how we treat the child care expense deduction does matter.

I'll skip point five. It is a quote from the finance department indicating exactly the same position I'm taking here, which is that the child care expense deduction establishes neutrality between the two family types and doesn't favour a two-earner family over a single-earner family. Without the child care expense deduction, the tax system is tilted against the two-earner family rather than being equitable. Andrew Coyne, by the way, also supports this position. There's a reasonably wide political spectrum that could be said to support this view on the child care expense deduction—unfortunately not enough.

I would argue that it's not at all clear that single-earner families are indeed overtaxed in general in relation to two-earner families. It is true that single-earner families pay more income taxes than two-earner families, but it's not clear that this is unfair to the single-earner families.

This committee has no doubt seen the calculations prepared by the Department of Finance in the brief to the United Nations Commission on the Status of Women dealing with the issues raised by Beverley Smith. It's worth revisiting these calculations. I guess I'm assuming these have formed part of the discussion of the subcommittee and I'm not presenting them in front of you.

They do a calculation with Dennis and Julie on the one hand and Louis and Sandra on the other. Dennis and Julie are a single-earner family earning $60,000. Louis and Sandra are a two-earner family earning a total of $60,000 between them. According to the calculation, the single-earner family pays about $4,000 more in income taxes, ignoring the child care expense deduction. But in the end, the two-earner family is shown to end up with take-home pay after child care expenses of about $4,400 less than the single-earner family. These calculations do not even take into account the extra value to the single-earner family of the untaxed and unpaid labour Julie provides to the single-earner household. Even if the value of this household labour were only $10,000 per year, this would imply that the Dennis and Julie family would end up close to $15,000 better off than the two-earner Louis and Sandra family. Where is the unfairness to the single earner here?

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Additional preschool services directed at all young children would be preferable to additional money directed to parents. In this short presentation, I really haven't had time to sketch my full views on the treatment of children and families with children in modern-day Canada. In general, I believe that society needs to direct additional resources to the care and education of children, particularly preschool children.

While it may be true, as my colleagues have said, that 71% of families would like to be at home, in general they are not. In fact, the figures say that over 75% of all children in the one and a half years to five years inclusive age bracket in Canada are currently in non-parental care arrangements each week. Unfortunately, these arrangements are often custodial rather than stimulating. They are arrangements that do not take advantage of—and my colleague stressed this point—the dramatic potential of young children to grow intellectually, socially, and emotionally.

Most young children used to be cared for during the week by their mothers at home. This is no longer true, and there's little sign that the past can be recaptured. Good evidence suggests that all children, whether they have a parent at home during the week or not, can benefit substantially from at least some participation in a good quality preschool program with other children.

I believe the most prudent use of scarce public funds that might be directed toward young children would be to substantially subsidize the availability of good quality early childhood education services for all children, irrespective of the employment status of their parents.

I'll be happy to clarify any of these views or arguments for the subcommittee.

The Chairman: Mr. Cleveland, I'm sure you've stirred up some interest there.

To conclude, Mr. MacKnight, please.

Mr. Robin J. MacKnight (Director, Canadian Tax Foundation): I don't envy this subcommittee its task of trying to unravel a tangled web of apparently conflicting and inconsistent social policy. But the task before you is as much social as tax policy.

The personal income tax system can be and has been designed to provide a number of different solutions to a number of different social issues. However, policy makers and legislators need to have a clear indication from the community as to how the community wishes to proceed to determine social and political issues. So why should you listen to us?

The Canadian Tax Foundation was founded in 1945. It is an independent, member-funded, tax research organization with over 7,800 members who are all tax professionals, lawyers, accountants, economists, academics, and government officials. Our mandate is to promote debate on the best tax system and the best tax policies for Canada. We don't advocate any particular issue; we just want to promote a debate. In this context, it's important to note that the tax unit for personal income tax purposes, in Canada at least, has always been the individual.

When income tax was introduced as a temporary measure in 1918, the tax unit was the individual. When the first tax reform conference was held in 1923, one of the topics of debate was the appropriate tax treatment of the family unit. When the Canadian tax system was critically analysed 40 years later in the 1960s by the Carter commission, this question was re-addressed. In the ensuing debate, the consensus was that Canada was not ready for family unit taxation, and the individual rather than the family tax unit remained.

In the absence of an open, informed debate on the question of the appropriate tax unit, the design of the tax system overall will not change. The absence of change should not be taken as an indication that the existing system is the best or even acceptable. It merely indicates that no better solution has been put forward.

Since the last time this question was considered, there have been significant changes in society's attitudes toward work, retirement, income sharing, income redistribution, education, and the nature of the family unit itself. Over the intervening 30 years since the Carter commission report in 1967, some of these changes have led to government policies that have been reflected in the tax system. Many different governments have introduced many different policies that affect the family unit. One of the problems we now face is this very lack of a consistent overarching policy for taxation of family members. We have created a patchwork quilt from sometimes conflicting policies and goals.

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Major changes in government support for children have produced a system that provides far more support to children in need than was ever contemplated under the original family allowance and child exemption system. The traditional support measures for all children have given way to enhance support for those in need and for those attending or contemplating post-secondary education.

While the present system seems to have built-in biases against certain groups, the measures that have produced these apparent biases have been introduced to eliminate even more serious biases against other groups. In examining the options for change, your committee should not assume that the status quo represents the consensus of the community or even the result of a deliberate tax policy. It may well be that drift or attention focused elsewhere has resulted in unintended consequences. It may also be that benign neglect has produced the best compromise for thorny problems.

I would like to address three aspects of the family tax problem. The first one is the tax rate issue, which is the high marginal rate of tax for those returning to work or entering the workforce. The second is the discrimination between one and two or more income earners, which is compounded by the tax rate issue. And the third is the non-recognition of costs incurred by stay-at-home parents.

Looking at the first issue on tax rates, the Canadian tax system has always been based on the taxation of the individual and his or her dependants. When more than one member of a family has separate sources of income, each member is taxed separately. With a progressive rate structure each family member takes full advantage of the low tax rates on income below the top bracket. This provides an apparent advantage to the family that has two earners over a similar family with the same total income and only one earner. A significant disadvantage of taxing the family as opposed to each individual is that unless there are separate schedules for the various family types, the spouse who is just beginning to enter or return to the labour force is effectively taxed at the top marginal rate of the spouse. This provides a significant barrier to entry or re-entry to the market, which Mr. Cleveland just spoke about.

While the position of successive governments over the last 30 years has not changed, Canadian society, the labour force, and the tax system have. Working mothers and working wives have become common, and the tax system has changed to recognize that fact. The introduction of a deduction for child care expenses in 1972 was the early tax reform response to the problem of working mothers and fathers. Subsequent changes have enlarged the tax savings available for parents who must pay for child care.

As two working parents became more common, society was more concerned about the equitable treatment of spouses returning to work. Tax policy was worried about the high marginal tax rates applicable to the small income of wives when they earned enough to reduce the spousal exemption enjoyed by their husbands. Often the reduction in the spousal exemption, combined with tax on the wife's earnings, produced a very high rate of tax, and certainly made such entrants into the labour force uncompetitive with single individuals. While that problem has been addressed by a very small allowable income for the spouse, along with a more generous threshold for tax, the threat remains. If the back-to-work spouse affects the tax position of the spouse already working, there is a tremendous difference in the tax position of married and single new or returned entrants to the labour market.

The structure of our system is such that there is a big jump in marginal rates just as individuals begin to earn only average income levels. The effect is exaggerated when the returning entrant earns an average income and must face these high rates in combination with the additional taxes for the Canada or Quebec pension plans and employment insurance, and the clawback of refundable federal or provincial tax credits for children or the alleviation of the burden of other sales or property taxes.

We continue to be schizophrenic in our treatment of the family. While the individual is the basis for income tax, Canada and Quebec pension plans, and employment insurance, family income is the determinant for the child tax benefits, both federally and provincially, the GST refundable credit, and provincial refundable credit programs.

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The current debate about the appropriate taxation of the family has to be extended beyond merely the issue of income splitting and the interaction of income tax, social security levies, and the clawback of social benefits. If we switch to a full-family system, what happens to other family members? Do the stay-at-home adult children become part of the family tax unit, especially if there's a true pooling of resources? Would the same hold for senior parents living with their children to ensure that they are properly cared for without recourse to expensive public facilities? How do we treat siblings living together?

If I could now turn to the question of discrimination, the fair treatment of families may be equally offended by other aspects of the tax system. Contributions to the CPP or QPP and EI double the cost of social security for the two-earner couple once maximum income levels are reached. This discrimination is at least partially offset by the fact that the two-earner couple stands to gain from double the benefits. Similarly, the maximum allowable dollar limits on contributions for pensions and RRSPs could be up to double the size of retirement savings for two-earner families, dwarfing the benefit of the spousal RRSP allowable under the Income Tax Act.

In all cases, these additional benefits available to the two-earner couple are enhanced by the income splitting available when the benefits are taxed. If all of these aspects of the tax system are converted to a family basis, the issue of tax rates once again becomes critical. If the marginal rate applicable to a second earner is above the rate applicable to a single taxpayer, there is a built-in discrimination against the single earner who finds the after-tax cost of deductions for pensions, RRSPs, or child care, for example, higher than for his or her married counterpart.

How far can we go in striving for equality? How do we determine equality in any event? This discrimination apparent in the existing system can be reversed if the stay-at-home spouse in a family is considered to have earned not real income, but imputed income, which could then be taxed. In that case, the single-earner family has a distinct advantage, as Professor Cleveland has noted. However, we have been loathe in Canada to tax imputed income—it makes for interesting theory, but it's lousy politics.

Turning now to the third issue, which is the burden of children and the stay-at-home parent, Canada does not recognize children as a burden on their parents. If the family income is high enough, child tax benefits are no longer available. Unlike many of our competitors, we provide no tax concession for dependent children in the income tax system, as our resources were remobilized in the early 1990s to direct all public support for children through the child tax credits. It was felt then that the problem of children in poverty justified such rough justice. Now that we see some possibility of a reduction in the overall tax burden, it may be time to redirect some of our resources to higher-income families—or maybe we already have.

Maybe the enrichment of the RESP system provides specific assistance for the responsibility that families feel to further their children's education—a responsibility that nicely matches the national concern for a better-educated workforce. Tax credits for post-secondary and lifelong education further the objectives of the family and the nation, but the reality may be that only high-income earners can take advantage of these programs.

The final irritant for many one-earner families is the lack of a measure comparable to the child care expense deduction allowed to two-earner spouses. The apparent lack of any recognition of the costs involved in having a stay-at-home parent seems to discriminate against those who value home and family. In fact, by ignoring the imputed income accruing to the family by having someone not occupied in the outside labour force, the one-earner family enjoys a significant but highly abstract advantage. The problem seems to beg the addition of a deduction or credit for stay-at-home parents just as the tax rate issue does. Policy-makers have to be aware of the resources now made available to children through the child tax benefit system and the advantages of increasing that program, and coincidentally, adding to the public money available to all families as a richer program phases out higher up in the income scale.

The present system also provides resources for higher-income families through the RESP program, given the importance attached to higher education by this government and by the families most likely to participate, but it might be unwise to divert resources from existing arrangements to families not now benefiting from this program.

In summary, your subcommittee has been assigned a very difficult task, far more complex than it appears. There are essentially two main social issues to be resolved. The first concerns how much more recognition should be provided to families with children and how much the existing programs fail to help the average Canadian family with children.

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The second issue revolves around a much more fundamental problem: the basis for taxation. The existing system reflects a number of priorities that may have been of more concern in an earlier time. If the nation is able to decide on the appropriate equality between a family with one earner and one with two or more, the appropriate treatment of children and child care expenses may be less critical.

As the federal fiscal balance continues to improve, the possibility of overall tax reduction becomes more likely. Then the issue of equitable taxation of the family is yet another example of the wisdom of putting tax reform before tax reduction. If changes have to be made in the area of family taxation, they could be combined with the reduction in the tax burden so that the winners could quietly gloat and the losers could still save money.

Thank you, Mr. Chairman.

The Chairman: Thank you, Mr. MacKnight.

We will start, colleagues, with a 10-minute round.

[Translation]

Mr. Cardin, please.

Mr. Serge Cardin (Sherbrooke, BQ): Good afternoon, gentlemen, and thank you for your presentations. We have been hearing witnesses for the past several days. Between the four of you, you have touched on several points that have been raised by the other witnesses.

Personally, I agree with Mr. Cleveland when he says that he doesn't see any inequity in this situation such as it is indicated in our mandate; I don't see any either. Still, the witnesses have told us that families felt there was some unfairness, and that is why the family aspect of our mandate is so important.

When listening to witnesses, we realized that people would like us to direct more and more of our action toward children, toward families with children. All week long, we have been told that some people want to take care of their children in the home, while others are prepared to have an outside job and to have them taken care of, and people would like the government not to direct people toward one choice or another, but rather to support them and help them go along with their choice.

Those who are interested in entering the labour market are asking for quality daycare services and early childhood assistance, while those who stay at home, given that care services are heavily subsidized by the government, would like to receive a daycare benefit for their own children.

The issue of unpaid work has been raised. People would like this work to be recognized. Just as someone working outside the home can benefit from the child care expenses deduction, those who stay at home would like to have a similar benefit focussed mainly on the child.

So there are a host of possibilities and elements to be considered. For people who want to stay at home temporarily, there are parental leaves.

On unpaid work, we have some catching up to do regarding the basic exemption, both the personal exemption and the married equivalent; there is a great gap with the real cost of living. No adjustment has been made. We often hear about poor children, but the committee has been told that there are no poor children; rather, there are poor parents. If adjustments were made to the basic exemptions, there would be an income tax refund.

Concerning unpaid work, there could be recognition or an imputed salary that would enable the stay-at-home person to be recognized for the purpose of his or her contribution to a RRSP, to the Canada Pension Plan or to Quebec's Régime des rentes.

I have briefly listed several situations and several possibilities. I would like to hear what you have to say about unpaid work, about the recognition of unpaid work and the advisability of focussing our assistance more directly on children and not necessarily on parents. Children could also give rise to a supplementary basic exemption on the basis of age; as we know, costs vary according to the age of the child.

• 1620

So, generally speaking, I am asking you if you share the direction that more and more people are turning to, that is that we should help children and not necessarily their parents.

[English]

The Chairman: Professor Cleveland, please.

Prof. Gordon Cleveland: You certainly raised a lot, but I would agree with you in the statement that the committee wants to address the needs of all families, not just one type of family, and that there are different sets of needs.

I'm a professor of economics; I have my responsibilities. You're a politician, so you have your responsibilities. One of your responsibilities is to deal with the disjuncture between what is and what people think is, and there's a big disjuncture there, especially on the topics we're dealing with. For instance, many witnesses may come in front of you and talk about the lack of recognition of mothers or parents who stay at home. As far as the economist is concerned, there is tonnes of recognition of the fact that there is value produced in the home, because that's given a full deduction—not just a limited deduction, but a full deduction. There is no taxation on the work in the home. That's an enormous recognition, in some sense, of the value of that work.

If, as you seem to suggest, Robin, there actually were some imputed income and you figured out how much people produced at home, then those families we call single-earner families would now be taxed a lot more. You'd figure out how much the value of production at home was, and they'd be taxed a lot more than they currently are. Well, that's not the way we run our system. But as a result of that recognition in the tax system, what happens is that single-earner families are taxed more heavily than two-earner families to recognize that in fact they have a productive resource in the household.

You raised issues about exemptions for children and whether assistance should be directed at children. I think I would agree that assistance should probably be directed, in many cases, at children, because a lot of the problems we might talk about are problems about how children themselves are cared for and raised and all that. There is an issue about whether assistance that's directed entirely at the family actually ends up with the children. So that is a concern for whatever recommendations the committee comes up with, to make sure that whatever assistance is provided does end up benefiting the children. And it is a substantial concern.

That's one of the things that affects my view that early childhood services for all children might be a way to go. I really am thinking along the lines that...you may know about the recent report in Ontario by Fraser Mustard and Judge McCain from New Brunswick that recommended early childhood services—they called them early child development and parenting centres—be set up across Ontario for all children, whether the children were staying at home or whether they were in a family where both parents were going to work. It talked about all the recent brain research and the importance of the development of children in these early years, how that was critically important to the development of preschool children, which is a neglected area. I think along those lines I share your point of view that the assistance should be directed at the children in the most effective form.

Mr. Bruce Clemenger: On that last point, Professor, we disagree. Again, we see the primary unit responsible for the care of children as the family, not the state or other types of associations. We would encourage any policy adjustments to first better enable families, especially low-income families, to care for the needs of their children directly as parents. Then, if there's going to be remedial or additional care for children directed separately to children, that should be done after the family. The family should be given the first shot and the first chance and, we think, have the primary responsibility to care for the children. After that, perhaps we could look at other types of programs.

• 1625

[Translation]

The Chairman: Do you have another question? I will allow you a few more minutes if you want.

Mr. Serge Cardin: The assistance is granted directly to the children, but it is managed by the family. It is based on the real needs of the child and not necessarily on the situation of parents.

Mr. Cleveland, you are clever in juggling with figures. You are saying that the stay-at-home parents are not taxed on the value of their work. I have some problem with that, because someone should get a deduction for it.

Let us suppose that we recognize the work done at home and that we assume a salary according to the situation. A spouse stays at home and takes care of two or three children and we assume a reputed salary that could be taken into account for computing the family income; then the other spouse could be taxed because of that. His marginal tax rate would be affected. So, at that level, part of the amount would be clawed back. However, when you tax someone who is doing unpaid work, you are not doing that person any favour.

[English]

Prof. Gordon Cleveland: I completely agree. I would be completely sympathetic if as politicians you don't want to touch this one with a 10-foot pole or a 40-foot pole. The idea of taxing households on the imputed value of household labour is a non-starter, and nobody thinks it's a starter. The point, really, that I was making is that I don't think you can understand the taxation of single-earner families in our tax system without recognizing that's part of the construction of the system. If you just take a $60,000 single-earner family and compare it to a $60,000 two-earner family, you're doing the wrong comparison. The $60,000 single-earner family is better off than the two-parent family with $60,000. They have an extra source of value, production, and so on that is not recognized just in stating the $60,000 of income. That's why it's important. I'm not trying to suggest that it should be taxed. But in understanding why we do things the way we do, that's absolutely key to it.

The other point really is around the child care expense deduction. My friends here have tended to say that single-earner families should be given the same tax treatment for child care as the two-parent families, and that it's very unfair. As far as I can see, they are given the same tax treatment now. In other words, the child care expense deduction forgives the taxes on top of the $7,000 of child care. When you produce it in your own home, you're also not taxed on the value of these child care services you produce. So the situation with the child care expense deduction is completely equivalent in terms of the treatment of child care.

I would say to my friends, I completely agree that these two families should be treated equally, and they are, in terms of child care. That's the entire reason for the design of the child care expense deduction. So if you go back to the finance department and talk about what the rationale was, that was the rationale exactly—fair treatment of child care expenses of the woman entering the labour force versus the tax treatment when she was inside the home.

The Chairman: Thank you, Professor Cleveland.

Mr. Herron, you have 10 minutes.

Mr. John Herron (Fundy—Royal, PC): Thank you, Mr. Chair. Thank you very much for your presentations. I definitely appreciate hearing your views. We've heard a number of different views throughout the country, and although we say we haven't heard anything new, every time we have a presentation there's a different nuance that we haven't considered.

Mr. Paul Szabo (Mississauga South, Lib.): I'm sorry to interrupt, but Ms. Redman has to be at another committee.

Mr. John Herron: I would be very happy to forgo to my colleague if she has to leave and she wants to ask her questions now.

Mr. Paul Szabo: I think she did have a question or two. Would that be acceptable?

Mr. John Herron: If it's okay with Mr. Chair.

The Chairman: All right, Ms. Redman.

Ms. Karen Redman (Kitchener Centre, Lib.): Thank you, Mr. Chair. I would like to thank my colleague for deferring to me.

• 1630

Professor Cleveland, I really appreciate your presentation, because I think one of the challenges, when you look at anything in government, is stepping outside the box and being creative, and you've brought a perspective that we haven't heard a whole lot about before.

When you talk about the child care expense deduction, one of the things we've learned through our committee hearings is that only 17% of the people who are eligible actually take up that—

Mr. John Herron: You can't take my questions.

Ms. Karen Redman: I'm sorry. Was this your question? It's because we both drank the same coffee.

The average deduction is around $2,600, which in their pockets is about $700. I sit here and it sounds like a wonderful benefit, but the uptake was exceedingly low. I think this whole committee was surprised. You're shaking your head. It's not low?

Prof. Gordon Cleveland: It's not true.

Ms. Karen Redman: Would you like to expand on that?

Prof. Gordon Cleveland: I did some research with the Canadian national child care survey. That's the best child care survey we've ever done. It was done by Statistics Canada in 1988 and included 25,000 families across Canada—a very big survey, a very big sample.

When you look at that evidence, you find you can break people down according to what type of child care they use and ask what percentage of each of them said “In answer to questions in this survey, yes, I plan to claim this on my taxes”. We don't know whether they actually did, but they said they planned to, and they were answering a series of questions on the cost of their child care, so it's very reasonable to believe that these are good answers.

What we found was that if they used regulated child care, 95% to 100% were going to claim the child care expense deduction. But the numbers for those using informal care are much lower. For families using a babysitter, a nanny in the home, or even using a relative, about 30% to 35% of them claimed that they would get the child care expense deduction.

All of those numbers are a lot higher than 17%. Now, of course, some people are not eligible to claim it, and I was only looking at preschool children, so it might be true that for school-aged children—eight, nine, ten, and eleven years old—there may not be so many who claim it. I would argue that's not a tremendously large policy issue. But amongst the preschool children, where the bulk of the problem is, the number at the lowest is about 35%, and for some types of care it is much more like 85% to 95%.

Furthermore, what a colleague and I did was we ran some what are called regressions on the prices of child care paid by different individuals, and it turned out that those who said they were not going to claim the child care expense deduction used cheaper child care. Now, there are different possible interpretations of that, but one of the possible interpretations, holding many other things constant, is that in fact those people who don't get receipts from their caregivers form a deal, a bargain, with their caregivers. They get lower-priced care as a result of it, and the person, who is probably avoiding taxes, also gets to not be found out by the tax department. It's a deal between them. But that means that even the person who doesn't claim the child care expense deduction gets a very significant benefit in terms of lower cost of child care out of the child care expense deduction.

Ms. Karen Redman: But with logic then, if we use your line of thinking—and I just want to clarify that these are published reports from Revenue Canada that we're basing these statistics on—the conclusion is that by offering the child expense benefit, we're driving people underground. That's forcing the cost of child care down; therefore, they're deriving a benefit despite the fact they're not claiming it on their income tax form.

Prof. Gordon Cleveland: I don't think the child care expense deduction is what's driving people underground. What's driving people underground is the fact that income is taxed. Right?

Ms. Karen Redman: I appreciate that clarification, because it seemed to me you were making a cause and effect on that.

Prof. Gordon Cleveland: No, I wasn't trying to say this was created by the child care expense deduction. But I think the point of our research is, in comparison to the 17% figure that you've been given.... Maybe it has to do with the different ages of the children we're dealing with, because the child care expense deduction covers you up to age 16, and a lot of people may not claim it for very small expenditures for a 14-, 13- or 16-year-old. That may amount to lots and lots of people not claiming it. So that's a possible interpretation. I'm just spitballing that answer here.

• 1635

But the evidence we have suggests that at least 33% of families with preschool children claim the child care expense deduction, and a very substantial number who don't claim the child care expense deduction nonetheless gain a benefit from it, which is in effect a tax benefit.

The Chairman: Let me clarify. You're saying 33% were intending to claim.

Prof. Gordon Cleveland: They are intending to claim in answer to the question on their taxes on the child care expense deduction.

The Chairman: Not that they did claim.

Prof. Gordon Cleveland: Not that they did claim.

The Chairman: You're not disputing Revenue Canada's figures whereby only 17% physically actually claimed it on their returns, are you?

Mr. Paul Szabo: Let's clear the record here. The 17% is not of eligible families; that's of all families.

Prof. Gordon Cleveland: Right.

Mr. Paul Szabo: In 1996, according to the income statistics, the analysis of the 1996 tax returns, there were 759,000 claimants and $2 billion in total deductions. The average claim, therefore, was $2,600. It cost the government just under $500 million for these deductions; therefore the average benefit was a little under $700.

So on the 17%, there's a little misunderstanding there. But on the one-third, interestingly enough, you're following this one-third that they said they would. This is why surveys are bad, because anybody who said, yes, I have these receipted expenses but I'm not going to claim the child care expense deduction, would basically be admitting to tax fraud.

The Chairman: Ms. Redman.

Ms. Karen Redman: Thank you, Mr. Chairperson. I apologize. This is the height of rudeness, but I will try to stay for the answer. I would like to ask this question to anyone who's interested.

One of the really enlightening pieces of information that came forward during our subcommittee hearings was from Mr. Shillington's work, where he looked at the number of two-parent working families, or one parent at home, or one parent working part-time in a two-parent family. Basically, the statistics remained a third, a third, a third, regardless of the income level they were at.

I found that really interesting, because from the get-go—and we've all come to this with probably our own prejudices and mindsets; mine has been that we ought not to be committing social engineering, and what we need to do is offer families the greatest amount of choice.

I found that very interesting, given the fact that—and I think it was Mr. Stock who was talking about this—more parents say they'd like to stay home than do stay home. Yet when you look, it doesn't matter if you're in the over-$100,000 or the $60,000 income bracket; the statistics remain fairly consistent. I wonder if you'd like to comment on that from your perspective.

Mr. Peter Stock: Sure.

I guess it's quite feasible that somebody who's earning $100,000 and living in Toronto needs all of whatever disposable income they have just to pay the mortgage. Conversely, somebody who's living in a rural area, and maybe even on a farm or self-employed, can live on a much lower income and cover their costs. So I'm not sure that $60,000 or $100,000 is necessarily a high family income any more, and it doesn't necessarily reflect on the larger issue at hand of what sort of child care choices people would make.

Ms. Karen Redman: Would any of the other witnesses like to comment? No?

The Chairman: Mr. Herron, would you like continue?

Mr. John Herron: Karen has to buy the coffee next time. She—

Mr. Paul Szabo: She took your coffee and your question.

Mr. John Herron: And some of my questions as well.

I would like to reiterate some aspects of them. I think Karen's thinking was similar to where I was going to go.

First of all, I'm going to try to approach this more from a child care perspective as opposed to the income tax perspective, because I think the children sometimes get forgotten in the equation in that part of it.

I think the reality is something for us actually to visit. The Revenue Canada statistic—and, Paul, you can sort of listen out of one ear to make sure I'm right—is that essentially only one-third of parents who are eligible to claim the child care expense deduction do, and of those who do, the average is about $2,600, which means about $700 into each family's pocket. That's Revenue Canada's statistic; that's roughly where we are.

• 1640

Mr. Paul Szabo: Yes, the average.

Mr. John Herron: Yes.

What I'd like to encourage is really the word “choice”, that we shouldn't encourage one type of child care over the other, but we shouldn't penalize or compel in a different direction.

So one of the things that has been discussed within the committee aspect of it is that if that $700 value in terms of net benefit to that family unit is true, what would be wrong with being able to say if we were able to go down one channel, you can opt into the child care expense deduction mode or you can receive a $700 refundable tax credit? That would cost the treasury about $1 billion to $1.5 billion, so it's kind of quasi-affordable in that regard. Then it wouldn't discriminate against one type of child care over the other.

Could I have some comments from anybody on that kind of model?

Mr. Peter Stock: Sure.

I think the key point—and I'm not sure this was exactly addressed before, but Mr. Szabo got at it a little bit—is who is actually claiming the deduction? From the studies I've seen on it, it seems that there is a very small percentage of families, probably fewer than a third, that are able to take full advantage of the deduction. They may be getting a much greater benefit than the $700. That's an average figure for those who are using it. There are some who are using the entire $7,000 or $5,000, depending...and gaining $1,500 or more. Actually, it would be up to—

Mr. Paul Szabo: Up to $3,500.

Mr. Peter Stock: Yes, $3,500, obviously a huge benefit if they're able to use the full amount of the receiptable deduction. There are many others who may have their kids in informal care and are able to claim a small amount, and there may be a much larger number of those who help to bring that average down so it's actually $2,600. They may only be claiming $500 or $1,000 for summer camp or whatever does count as receiptable day care under the rules.

In fact, it may be as small a number as 10% of families that are actually able to take advantage of this deduction. So, yes, we see some gross inequity in that whole situation, and we like the idea of levelling the playing field.

I don't really buy into the idea that stay-at-home parenting is something that.... It certainly is something of benefit, and it's probably possible to assign a figure to what that benefit is. That's what economists do, right? That's true, but I don't believe that's a reasonable thing to do—and I'm not suggesting that any of the witnesses said that is a reasonable thing to do. But I don't think we calculate our taxation on the basis of that; I think we calculate our taxation very generally on income. If we were to consider taxation on the basis of any sort of volunteer work, if you will, we'd have to consider the taxes Boy Scout leaders and Sunday school teachers should be paying as well, and I don't think that's reasonable.

So the point is, yes, we need to look at the deduction and ask, how can we extend that to other—

Mr. John Herron: What about the option route?

Mr. Peter Stock: We still prefer the deduction, because clearly there are expenses involved in child rearing, whether you have kids in receiptable day care or whether it's informal care that is not receiptable. Somebody was indicating that somehow there's—

Mr. John Herron: Paul will probably talk to that.

Prof. Gordon Cleveland: It can be receiptable.

Mr. Peter Stock: It can be receiptable.

Mr. Paul Szabo: Who said you need a receipt?

Mr. Peter Stock: Why should you need a receipt? This is really the question.

Mr. Paul Szabo: The tax act doesn't require a receipt.

Prof. Gordon Cleveland: It claims it requires evidence.

Mr. Paul Szabo: It requires that you declare who the caregiver was, if it was an organization, or an individual with their social insurance number. No receipt is required.

Mr. John Herron: My other question is one on which I don't know if I'll find myself to be more in the minority within the committee in this regard, but we'll find out as time goes on.

I agree with the term Mr. MacKnight used, in terms of the taxation system being schizophrenic with respect to so many deductions being based on family income and yet we actually tax on individual income. Given how overtaxed our society is in general, in terms of permitting the income-splitting perspective or joint filing, whichever term you want to use, that is something that has been debated.

• 1645

The comment made by Mr. Cleveland, I think, is accurate, and you'll say we're not recognizing the value of the work, that we're not taxing the value of the work that is done inside the home. But we're also not recognizing families who are making a sacrifice and forgoing a second income. I think that family perspective is something we should engage in. Some of the things people have had a problem with in income splitting is the fact that 16% of our families are one-parent families, and they don't benefit from that. Those people who are in the lowest marginal rate don't benefit either. Yet on the very top end are some professionals who income-split left, right, and centre, so we're saying it's okay for the very top echelon, but not for middle Canada in that regard. That worries me.

The other comment is that I had this mentioned to me—and it was Karen's question again, so Karen spurred me on in this. It doesn't matter about the level of income, from the research that we had earlier by Mr. Shillington, when he pointed out that the participation of women in the workforce doesn't go up or down depending on the level of income. With that in mind, the argument about child care, that income splitting could potentially be a roadblock to re-entering the workforce—wouldn't that make that argument a bit of a myth?

Mr. Robin MacKnight: Yes, I think we'd better be clear on what we mean by income splitting, first of all. Income splitting is getting one source of income and splitting it into two. What we're talking about is two separate sources of income. That's not income splitting at all.

Mr. John Herron: Okay.

Mr. Robin MacKnight: Income splitting is where, instead of making a contribution to my RRSP I make a contribution to a spousal RRSP, so that when we retire the income flows to my wife and not to me. That's income splitting.

What we were talking about earlier, I think, about the imputed income is not income splitting. I guess you could call it income forgone. Just for the sake of discussion, let me use a gross example of how you might value it. If we have a two-income family and they have to hire a nanny and the nanny costs $18,000 a year, after tax, or we have a one-income-earner family and one spouse stays at home and provides the services the nanny is providing for the other family, well, one could say that family has an imputed income of $18,000, because that's what it would have cost to go out and hire the nanny.

So, really, if you're looking at the economic equivalence of the two families, you've got the two-income earner with $60,000 coming in, and $18,000 going out, for a net $42,000. On the other side, with the single-income earner, you've got $60,000 coming in plus another $18,000 imputed, so they're really at $78,000 versus the $42,000. Now, that's wonderful theory. It's lousy politics, but it's wonderful theory.

Mr. John Herron: I wouldn't really want to even go down that road. I was talking about more of the traditional use of the term for this debate with respect to—

Mr. Robin MacKnight: Right. That's why I want to be clear about what we mean when we say income splitting. That's not income splitting. That's a completely different concept.

Mr. John Herron: I'm talking about the single earner who's making maybe $60,000 working outside the home and the parent who works inside the home making zero.

Mr. Robin MacKnight: Yes. That's not income splitting.

Mr. John Herron: And basing that on a family income...I guess that doesn't matter.

Mr. Robin MacKnight: Well, that's not income splitting. What that is, is one income and one income forgone, and an income forgone is nothing for tax purposes because we don't impute income to it. So that's not income splitting. There's only one income and it's going to one person.

Mr. John Herron: Okay. We'll use the term joint filing, basing it on family income versus individual income.

Mr. Robin MacKnight: That's a different concept.

Mr. John Herron: That's what I was referring to.

Mr. Robin MacKnight: That's what the U.S. uses. If you're going to use the joint income concept then, you have to worry about whether our tax rates are enough or are appropriate. If you've got one spouse earning $55,000 and the top rate kicks in at $60,000, for the next spouse to go out and earn $6,000, suddenly they're going to pay 40% tax on the first $5,000 and 50% tax on the last $1,000.

• 1650

That's when you get into this marginal rate, the high marginal rate issue, and the elasticity of market forces that Gordon was referring to earlier in his study. That's a serious issue. The problem there is the tax rate.

The Chairman: Mr. Szabo, please.

Mr. Paul Szabo: Thank you, gentlemen. Between the four of you, you have covered the full spectrum of the dilemmas that are facing the committee.

Child care expense deduction is regressive by its nature because it benefits high-income earners over low, in terms of benefit for the same level of expenditure. It was originally brought in for lone-parent situations only. Then somebody had this bright idea that it would be extended. The Symes case established that child care expenses are not business expenses.

Collaterally, and when you consider all the other employment expenses that we have that are not deductible, it's a moot point to suggest that somehow this is absolutely necessary for employment. In fact, by virtue of who has been claiming and how few people actually claim it, it's not a determinant in terms of parental choices.

The Shillington information, as well as Human Resources Development, confirmed that parental choices are ostensibly inelastic to family income—inelastic. Whether you're making $100,000 family income or $20,000 family income, it's inelastic. It's still a third, a third, a third, and that's just the way it is.

To suggest that a movement of a benefit is going to drive people in or out of the labour force is absolutely a false conclusion based on no data. It's not based on what actually happens and has happened in history based on the child care expense deduction.

Now, having said all that, I am really surprised that everybody's still hung up playing around and trying to compare one earner to two with the same level of family income. It's a totally intellectually dishonest economic analysis because it's not dealing with the fundamental point. We know that under our progressive income tax system of individual taxation units, one income earner is always going to pay more tax than two at the same total family income, $60,000 versus two $30,000s.

The C.D. Howe Institute was...that was basically the debate in the House; that was what prompted the Reform motion on the inequity. They came before us and said, but the vast majority of the differential has to do with progressivity and individual basis of taxation. So let's take that off the table. The only thing that's left is the child care expense deduction, quite frankly, offset to some extent by the spousal amount that a one-income earner would be able to get if one of the spouses withdrew from the labour force. And there are some minor adjustments to the child tax benefit.

Now having said all that...Judith Maxwell came before us this morning from the Canadian Policy Research Networks. Judith and their organization have put together a lot of information. I thought she put it very nicely. She said when you have a parent withdraw from the labour force, you forgo income. You forgo big net income, cash in the pocket. Even with a $25,000-a-year earner, the family is going to lose $15,000 to $20,000 of cash in their pockets as a result of that decision to withdraw. It is head over heels much more than the child care expense deduction could ever be worth.

They also lose pension entitlements and the ability to accrue pension room to either RRSPs or to participate in CPP. They also lose promotional opportunities. They also lose a whole host of things. But she also confirmed that—some of it was anecdotal, but some of it I think follows from the research they have—there is a higher level of participation in the community, in the volunteer sector, and in the charitable sector where there is one parent in the home versus two parents working. The level of contribution back to the community is higher.

So this imputed income stuff...there are some offsets to that as well. I know it's a dog's breakfast.

I want to ask all of you for your opinion because I think this is the crux of the issue. Judith Maxwell laid out, I think, the seed here. Is it not the case that what we should be looking at is not one family compared to another family, but rather let's look at a family and what the economic consequences are to two choices?

• 1655

I'll start with two people with a $40,000 income and a $25,000 income, for a total income of $65,000. Then a child comes into the picture. I have two choices. If I choose to pay for a third-party caregiver and get the child care expense deduction, I can work out the economics. My other option is to have one of us withdraw and provide direct parental care. I can figure out the clear economics of that as well—very clear. The differential is enormous. It's a $65,000 family income compared to a $40,000 family income, in my view, offset to some extent by the tax benefit of the child care expense deduction, the spousal amount, and a modest adjustment to the child tax benefit. Do you agree or disagree?

The Chairman: That's the question. Who would like to answer it?

Mr. Bruce Clemenger: I'll begin. I only did an undergraduate in economics. I wasn't at your institution. Some of your comments make me think of opportunity costs. I think that's what you are referring to. Do we compare two different families or do we compare the choice one family may make? I would agree. It perhaps refers to the optics that some of the questions and comments referred to.

Maybe the child care expense deduction is forgoing tax on income earned to care for children. The feeling is that families with one stay-at-home parent are caring for children too. Is that reflected at all in the income tax structure? That dawned on me as I was reading through the finance committee's report. They were comparing the two single-income families. One family had two children, four and eight, and the other family had no children. There was no tax differential and the only change was the child tax benefit. The family with two children got $713 more than the family without children. Does that mean they have the same discretionary income or $713 more? No, it doesn't because they are caring for a four-year-old and an eight-year-old.

I wonder if the basic question is whether our tax system fully reflects the cost of families having dependants. Again, we pushed this beyond children to the elderly, the infirm, and others. I would agree with you the proper measure is to look at the family and the opportunity costs of forgoing employment to stay home and care for the children, or being employed in the workforce. Is there a semblance of equity in those choices facing those families?

Prof. Gordon Cleveland: Yes, there is a disparity between those two families you talked about. The single-earner family is better off.

Mr. Paul Szabo: I talked about one family.

Prof. Gordon Cleveland: One family making the choices—think of it as two families or think of it as one. The single-earner family, as I think my friend over here said, in going through the analysis, will end up being better off, not worse off. I think that's the essence of what the finance department presented in the Beverley Smith hearing.

Mr. Paul Szabo: A $65,000 two-income family is worse off than a $40,000 one-income family.

Prof. Gordon Cleveland: Are you saying the value of services produced in the household is zero? That is the essence of the problem. In other words, you are saying if a family decides to have one of the parents in the family stay at home, nothing that person produces in the home is worth taking into account. Of course, that's wrong.

Mr. Paul Szabo: Give us examples.

The Chairman: Let me jump in for a second, Paul. Could you tell me what value a stay-at-home parent produces that a working parent doesn't also produce? Give us examples of where that added value is for the stay-at-home parent.

Prof. Gordon Cleveland: Child care.

The Chairman: But the working parent gets a credit for it.

Prof. Gordon Cleveland: No, they don't.

The Chairman: Yes, they do.

Prof. Gordon Cleveland: No, they don't.

The Chairman: They get money in their pocket at the end of the day.

Prof. Gordon Cleveland: They do not.

The Chairman: I disagree.

• 1700

Prof. Gordon Cleveland: Excuse me. I apologize, and I'm not trying to be argumentative here. But before the hearing started, I went through this little intellectual exercise with my friend, Peter, which I think is instructive.

If you take a family that has $7,000 worth of child care expenses and say this family is in a certain tax bracket, so they get $3,000 worth of child care expense deduction, what is the price of child care now faced by that family? It's $7,000 worth of expenses and $3,000 worth of child care expense deduction.

My friend answered the question by saying it now costs them $4,000 for their child care, but that's the wrong answer. In figuring out why that's the wrong answer, you actually understand how the child care expense deduction works, I would argue. In fact, the price of child care to that family is still $7,000. They've only saved the $3,000 they would have paid in taxes on top of the $7,000. That's the whole argument behind why the child care expense deduction is not an unfairness to—

Mr. Paul Szabo: With due respect, I understand how you get it, if you're looking in a total vacuum of just the child care expense deduction. But if you look at the economic well-being of the family in terms of cash in their pocket, what you've just said is nonsense. You have to consider that I may have an imputed $7,000 child care expense, but I've also given up a $25,000-a-year job, which means my family is $20,000 worse off in terms of cash in the pocket because of that decision. That's also on the table at the same time. You just can't ignore the forgone net income cheque.

Prof. Gordon Cleveland: I'm not ignoring the forgone net income, but I just believe—and most of economics would suggest this is true—the person has not made an irrational decision to stay at home, but rather their rational decision is because the value of what they're producing in their home is more valuable to them and their family than what they would have produced outside.

Mr. Paul Szabo: I have to tell you, the only example anybody has ever given us about home production was somebody who stayed at home, cared for their kids, and also grew carrots in their garden so they didn't have to buy carrots.

Prof. Gordon Cleveland: The predominant thing is they actually produce child care services and they believe—

Mr. Paul Szabo: They also repair their roofs; they also clean the house.

Prof. Gordon Cleveland: The witnesses here have suggested that those child care services....

Mr. Robin MacKnight: There are all the expenses they don't have to incur. But if you're going to measure the shortfall in your example, you don't look at the pre-tax number; you look at the after-tax number. You have to cycle in the new spousal deduction and the family deduction on the $40,000 income earner. That's minor.

But there's something else you have to bear in mind, and I think this is where the difference is. When one spouse makes a conscious decision to stay at home, there's a whole series of expenses that are not incurred that would otherwise be incurred.

Mr. Paul Szabo: Sure.

Mr. Robin MacKnight: You have to factor those back in. Presumably the family that has made that decision has factored those expenses in and said “We are better off not incurring those expenses and providing child care ourselves by staying at home”. That's a social issue you can't quantify.

Mr. Paul Szabo: That's the economic part of it, but do you want to answer the question of whether the appropriate economic analysis is to look at a family, given its two choices, or to do it the way the C.D. Howe Institute did it by comparing a $60,000 income to two $30,000 incomes? Which is the most appropriate way to analyse this situation we're dealing with?

Mr. Robin MacKnight: Personally, I think you should look at each family, which is why you start to wonder whether this is really an issue we should deliver through the tax system.

Mr. Paul Szabo: We're so concerned about discrimination against families with children, but interestingly enough, our Income Tax Act discriminates against families that are intact compared to divorced families, for no other reason. The intact family where both spouses are working gets two personal amounts in non-refundable tax credits and the child tax benefit, to the extent they get it for their child. However, if you are divorced, you get two personal amounts, an equivalent-to-married for the child, plus the child tax benefit. It's worth $5,380 of non-refundable tax credit based on 1996 numbers. That value is about $1,345 in the pocket for a divorced couple versus a married couple. That's twice the average benefit of the child care expense deduction. So if you really wanted to play around with numbers, you could show that the Income Tax Act discriminates against intact families. It's really a shame.

• 1705

The last question is my standard one about the principles. Let me read to you five general principles I think policy should be driven by.

Of course if we make some suggestions—and I'm not sure if we're really going to make some suggestions—a lot of people have talked to us about children and the outcomes of children and investing in children and the importance of that. So there seems to be a suggestion that our policy should be child-centred or take the best interests of children. Does anybody have a problem with that? Probably not.

Number two would be that most seem to acknowledge that parents are the primary caregivers and that parents are in the best position to determine the best possible care arrangements for their children. Given the complexity or diversity of family configurations and options available, etc., we don't think there's anybody else who's in a better position to identify the best possible care arrangement. Any problem with that?

I think we've been convinced that it's not a good idea to pit parents against each other for their choices, etc., and that in fact given the diverse circumstances of so many different families and lone-parent situations, optimally we should be looking for providing as much flexibility, options, or choices to families as possible. The policy, whether it be the tax or the transfer system, generally speaking should neither penalize nor compel parental choices.

Mr. Robin MacKnight: That's the principle of horizontal equity.

Mr. Paul Szabo: And finally, we do have to be inclusive of all the social realities around us—as an example, lone-parent situations. If we were to do something, for instance provide a deduction that wasn't going to be available to a lone parent who was on social assistance, people will fall through the cracks. Obviously you want to be as inclusive as possible for the configurations.

Those are principles that just seem to have been evolving over time. You notice also that they seem to be not gender-oriented. It's more choices of families.

Prof. Gordon Cleveland: I have a couple of things I could say. The first point is that that some of those principles would have you end up supporting the child care expense deduction, I would argue. And secondly, it ignores some of the requirements for the role the state plays in relation to children. For instance, logically speaking I could argue that your principles so far would require the elimination of kindergarten, because it directs the choices of families at a certain age not to have the complete flexibility of choice. But that would be a silly result, which I'm sure you wouldn't agree with.

In other words, there are some roles of the state—

Mr. Paul Szabo: You don't have to send your child to any school if you don't want to.

Prof. Gordon Cleveland: No, but I'm just saying that restricts the choices families have available, because it's highly subsidized; it's free. So it directs the choices of families toward the use of kindergarten, whereas your principles suggested that shouldn't happen.

There are some roles of protection in terms of the quality of child care that the state has taken on itself. There are regulations about how many children you can have and care for at one time, and so on. And again, I don't think you'd probably disagree with those, but those weren't included in your list of principles.

The Chairman: Does anyone else want to comment? Mr. MacKnight.

Mr. Robin MacKnight: Mr. Chairman, I'd like to make two observations about those principles. The first one is that none of them are related to income, which suggests a second observation. If it's not related to income, then why are we talking about the income tax system? Should we maybe consider a separate levy, something along the lines of the child care levy? Just have a flat levy and call it a poll tax of $20 a head, or something like that, and it all gets redirected into child care. Those principles apply whether you're a single mother earning $14,000 a year or the head of a Canadian multinational earning $400,000 a year. Those principles should still apply. And if those principles should still apply, then why are we necessarily dealing with the income tax system to fund those principles? Maybe we should find a different source. I just throw that out as an option.

Mr. Paul Szabo: Well, our mandate includes not only the tax system, but also the transfer system.

• 1710

Mr. Robin MacKnight: Well, it's clearly a transfer, and maybe this should be looked at as that. Let's call it that. This is a tax expenditure. If we're talking about child care and—

Mr. Paul Szabo: You can't separate fiscal and social policy on this issue.

Mr. Robin MacKnight: You can't, because tax transfers have to be funded somehow, and it goes through the tax system. But you're looking at whether the income system is the right way of delivering it. Maybe you should find another funding mechanism.

Mr. Peter Stock: Just briefly, this goes back more to your prior question about the single family. That is to say, it seems clear that there is a choice made by families at that stage when they're about to have children, and they make the calculation, as you suggested. The one thing that's probably changed in the last 20 or 30 years is the burden of taxation overall on families, whether they've got kids in child care or not. You're quite right: the child care expense deduction is a drop in the bucket relative to the forgone income or maintaining that income and choosing child care.

So there is a bigger question here of the overall level of taxation that I think really needs to be addressed. However, that being said, I think there are families that do that calculation right down to the last penny and will make a choice. Many people are right on the line, or maybe they're a little bit over it, one side or the other. So anything we can do in this minute area of the tax policy to help families make that choice.... When we looked at the numbers and 71% said they are staying at home with the kids or want to, there is a portion that are also wanting to stay in the workforce. I'm going to suggest that is a portion of the population where the kids are a little older; they're in school. They don't necessarily need to be at home full-time with the kids. As a result, I think we need to look specifically at that group of parents that have dependent children—

Mr. Paul Szabo: But it contradicts your own statement in your study that there was a social bottom line.

Mr. Peter Stock: Yes.

Mr. Paul Szabo: The other evidence we've been given basically shows that parental choices aren't being driven by a modest tax break. Family decisions are driven much more by family values, the options available to them, and basically a social value system. The Shillington evidence showed that whether it would be $10,000 annual income of a husband or $20,000 or $30,000 or $40,000 or over $100,000, across the spectrum it was basically one third of families chose to have one parent stay at home.

The Chairman: Professor Cleveland, I have just one remark. It's not really a question. I don't buy your calculations. If I went to my wife tonight and told her, “The value of your household labour, whatever tangible amount we put to it, is worth $10,000, and you have an advantage, because the government is not taxing you on it, sweetheart, so we're much better off because you stay at home”, I would have a hard time convincing my wife. And I know if I can't convince my wife, I can't convince the electorate.

I asked you the question before, with Mr. Szabo's question, which I think is the pertinent one. It's irrelevant to compare two $30,000 incomes or a $40,000 and a $20,000 income versus a $60,000 income, because that's not what happens out there. Out there, the decision is as a single-income earner: I have to either now decide to have a salary as a dual-income earner.... For example, we now either have to forgo x amount.... I've never seen a case where a single-income earner said “Fine, I'm going to drop my salary down to $60,000 so my spouse can go and earn $20,000 and we'll still be making $80,000”. It just doesn't work that way. So it's irrelevant to compare it.

I do want to ask the question again, because I don't think I got the answer. I don't see what value a stay-at-home parent produces that a working parent doesn't have to produce. Therefore, if you can attribute a value to the stay-at-home parent for that household labour, as you call it, that they produce, you have to attribute, I claim, the same amount to the working parent, because they do the same things. The only difference is that one gets compensated or gets an advantage or whatever term you want to use for the day care component. I'll buy the argument that a child care expense deduction is an employment expense, and for that reason it should be deducted. I don't buy the argument that it's a compensation for the tax.... I think the term you used was the forgone taxation on the revenues they have to incur.

I guess we'll agree to disagree. But since you indicated before that you wanted to say something, I figured I would throw in my comments and give you the last word.

• 1715

Prof. Gordon Cleveland: I don't mean to say that it's not an employment expense. Actually the two arguments run together. It's an employment expense and therefore shouldn't be taxed. You should pay it with pre-tax income rather than after-tax income.

The reason it's important.... There are many things. Mr. Szabo referred to many employment expenses having been gotten rid of: the protection they had in the tax system has been gotten rid of and they're no longer given special arrangements in the tax system. This is true. But the reason the finance department kept this one is that it sits on a margin in which decisions are very sensitive, despite what Mr. Szabo says, because the evidence is pretty strong in the economics literature on the sensitivity of the choices. The decision about entering the labour force or not is quite a sensitive choice to the benefits that are offered to individual families, and because of that sensitivity it's important to recognize it as an employment expense.

So because mothers who stay home and produce their own child care, which is the fundamental thing they produce in the home, are not taxed on it, then it makes a lot of difference how you treat, in taxation terms, the child care expenses.

So it has big implications in terms of the decision to enter the labour force or not, but it is being treated as an employment expense. That is the rationale for it: because it's an employment expense, it's not part of discretionary income, therefore deduct it from your income before you start calculating what your taxes are.

The Chairman: Thank you.

Are there any other questions?

On behalf of the committee members, I would like to thank you for your presentations. As you've suggested, it's not an easy task for us, but your testimony has certainly given us some food for thought, if not made our load a little bit lighter. On behalf of the committee members, I'd like to once again thank you and wish you a safe return back home. Thank you.

Colleagues, we adjourn.