…but if it does, their effective income tax rates will rise by up to 74 percentage points

By Marvin JS Ferrer

Prime Minister Justin Trudeau recently announced, with much fanfare, a new 10-year National Housing Strategy.  The Strategy includes a new Canada Housing Benefit intended to alleviate rising housing costs.  Details of how the Benefit will work remain scant, but using what few details have been released, some back-of-the-napkin calculations can be made.

How the Benefit Might Work

The Housing Benefit provides rent support for the poorest Canadians.  The Housing Benefit could provide a cash transfer (Figure 1A) that will not necessarily be allocated specifically for housing.  This is a good thing; if Canadians decide they want to spend a portion of the Benefit on food or other costs instead, they would be able to do so.

The Benefit could alternatively be provided through a voucher redeemed specifically for housing-related costs.  If the household had no housing costs (e.g. they are homeless, live with relatives, or have their housing costs covered by other programs), they would not be able to use the voucher for other expenses (Figure 1B).

If the household had housing costs before the Benefit was provided, they might choose to spend some of it on other costs instead according to their needs or preferences (Figure 1C).

The Benefit might create an effective tax increase of 74pp for the poorest 2.1%

The Benefit will provide 300,000 households an average of $2,500 per year.  Using Statistics Canada data, we can estimate the poorest 300,000 households have a total household income of less than $6,777[1] and are the poorest 2.1%[2] of all households.

They will receive an average of $2,500, but some will receive more, and some will receive less.  The Benefit will presumably be “marginalized” so that the entire Benefit does not disappear as soon as someone makes a dollar more than the income threshold (Figure 2).

In a previous PPGR article, I described the effect that clawing back benefits has on marginal effective tax rates (METR) for low and middle-class people.

Let us make two assumptions:

1. the Benefit will target the very poorest households, and
2. the distribution of households across incomes from $0 to $6,777 is uniform.

Given these assumptions, the lowest possible METR increase would occur with a $5,000 benefit that gets clawed back with the first dollar earned, until the Benefit reaches $0 when the household makes $6,777 (Figure 3).[3]  These households would face a marginal effective tax rate increase of 74 percentage points[4] due to the Benefit clawback.

Table 1 shows how the marginal effective tax rates and populations change if the first assumption does not hold.  For example, instead of targeting exclusively the very poorest, perhaps the Benefit will target households with children, people with a disability, or urban/rural populations.

Benefit that provides…	Assumed Income Threshold	Percentage of Households under Income Threshold Receiving Benefit	Lowest possible METR increase in percentage points
300,000 households an average of $2,500 each	$10,000	70%	50
	$20,000	22%	25
	$30,000	15%	17

Table 1:Benefit Effect on Marginal Effective Tax Rates and Beneficiary Population Makeup at Different Degrees of Means-Testing [5]

Is Means-Testing Inevitable?

While he thinks the Benefit is an appropriate response to housing affordability, Jonathan Hall, Assistant Professor at the Department of Economics and School of Public Policy and Governance at the University of Toronto, acknowledges the downside caused by the effective tax increase created by the Benefit.  “The problem is that without means testing it becomes insanely expensive,” he said in an email.

William Robson, President and CEO of the CD Howe Institute, agreed in an email, saying “Means-testing is inevitable given the expense of a universal program along these lines.”

 “This is always a problem, and I imagine it is becoming a bigger problem in Canada, where all the social insurance policies create extremely high marginal tax rates for the poor,” said Hall.

Robson suggested that the welfare wall created by the Benefit clawback could be mitigated, for example by using the Working Income Tax Benefit.  However, he cautions “these things are the classic balloon that, if you squeeze in one place, bulges in another.”

Addressing Poverty and Housing

Hall said that if the Benefit can be used for non-housing expenses, it is a better way of addressing housing affordability than rent control.

“The problem isn’t that the poor cannot afford housing, but that they are poor. Giving them money makes them less poor,” said Hall.

On that note, Hall said he prefers a negative income tax to address poverty, “which would make clear what the marginal tax rate [the poor] face is.”

A negative income tax is one way to structure universal benefits that clarifies the METR faced by low-income households.  Essentially, households with incomes below an income threshold would face a negative income tax and be owed money by government instead of receiving benefits that are clawed back, while those earning above the threshold would pay regular positive income tax.

Robson says a voucher-based approach presents some benefits.  In jurisdictions without rent control (e.g. Alberta, New Brunswick), landlords could recover a share of the Benefit by increasing rents.  “It would bring more supply of housing suitable for the recipients onto the market – which over time would mean that more of it would benefit tenants,” Robson said.

However, in jurisdictions with rent control (e.g. Ontario, Manitoba), renters will recover almost all the Benefit.  “It will mean that tenants benefit more completely in the short run, but prevents the increase in supply,” Robson said.

It is clear that the new Canada Housing Benefit will help some of the very poorest Canadians.  It is not clear that it will help many them very much.

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[1] From 2016 Census Table 98-400-X2016097.  (((300,000-(# households making under $5k))/(# households making $5k-$10k))*$5k)+$5k

[2] From 2016 Census Table 98-400-X2016097.  (300,000)/(total households in Canada)

[3] Given assumption 2, assume there are only two households: one earning 0$ and another earning $6,777.  To get an average Benefit of $2,500, the first would have to get $5,000 and the other would get $0.  The lowest possible METR increase happens if the clawback range is as broad as possible; clawing back $1,000 between $8,000 to $10,000 of income means losing $1,000 after making $2,000 (a 50pp METR increase), while a range of $0 to $10,000 means losing $1,000 after making $10,000 (a 10pp METR increase).

[4] (loss of $5,000 benefit)/(gain of $6,777 income)

[5] From 2016 Census Table 98-400-X2016097.

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Marvin JS Ferrer previously completed his master’s and doctoral degree in the cell biology of reproduction and fertility at Queen’s University, where he helped many Canadians start new families. His policy interests include science and research policy, industry-government relations, and health policy.  As a politically-minded scientist, he would like to advance the use of the scientific method to improve evidence-based decision making.