Who Benefits Most from Billions in Postsecondary Tax Credits? Not Low-Income Families -- C.D. Howe Institute

Nov 13, 2013, 10:00 ET from C.D. Howe Institute

TORONTO, Nov. 13, 2013 /CNW/ - Postsecondary tax credits cost the federal and provincial governments billions of dollars each year, but are not distributed equitably and may have no proven effect in boosting enrolment, according to a report released today by the C.D. Howe Institute. In "What You Don't Know Can't Help You: Lessons of Behavioural Economics for Tax-Based Student Aid," author Christine Neill finds flaws in the design of postsecondary tax credits and recommends they be better-targeted at low-income families that need them most.

Canada's federal and provincial governments spend a lot of money subsidizing postsecondary students, notes the author. Tuition and education/textbook tax credits, in particular, cost the federal government alone around $1.6 billion in 2012 - a sum greater than the net cost of the Canada Student Loan Program.

"There are good reasons to conclude these tax credits are poor policy, as currently designed," commented Neill. "The immediate benefits of the credits go disproportionately to students from relatively well-off families, who are not relatively sensitive to the costs of postsecondary education. Students from lower-income families benefit from them only after they have finished their education and have enough taxable income to claim the credit."

Among Neill's findings:

  • Only 10 percent of tax filers have an income above $80,000, but they account for about 42 percent of total tuition and education credits transferred to parents;
  • About one-half of all tax filers have incomes below $30,000, but they use only 7 percent of all tuition and education credits transferred to parents;
  • Very few postsecondary students are over the age of 40, but just over 20 percent of all tax benefits paid to students or former students go to this population group.

The author recommends a simple change to the tax credits - making them refundable instead of non-refundable - which would go a long way to making them more efficient and equitable. A non-refundable tax credit cannot reduce the amount of tax owed to less than zero, but a refundable tax credit can reduce tax payable below zero and provide a refund. This change would provide a more immediate benefit to students from low-income families, those who need it most.

The C. D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. It is Canada's trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review. It is considered by many to be Canada's most influential think tank.

For the report go to: http://www.cdhowe.org/what-you-dont-know-cant-help-you-lessons-of-behavioural-economics-for-tax-based-student-aid/23461

SOURCE C.D. Howe Institute