A family living in Newfoundland with three disabled children and a total income of $35,000 would not be subject to an effective marginal tax rate of 85.1% because it would not pay any federal personal income tax. The calculation of the effective marginal tax rate in the example does not reflect the fact that this family would be able to claim the disability tax credit for the children who have disabilities. In fact, a family under these circumstances would not pay any federal personal income tax until almost $43,000 of total income.
Not only would this family not pay any federal income tax, but in 2003 it would receive about $8,500 in federal net benefits through the Canada child tax benefit, the proposed child disability benefit, and the goods and services tax credit.
This being said, it is correct that some low and modest income families may face high effective marginal tax rates as a result of benefit reduction rates applying in addition to income tax rates over some income ranges. Benefit reduction rates arise from the need to income-test benefits to target government assistance to those who need it most. The budget presented in the House of Commons on February 18, 2003, indicates that “going forward, the federal government and the provinces will need to ensure that, as the welfare wall is overcome, low and modest income families with children who realize greater earnings, for example, by taking up better paying jobs--keep more of the extra money they earn. This will include examining the reduction or ‘claw-back’ rates for the CCTB as well as other elements of the tax and benefit structure that may affect incentives to work and earn income for low and modest income families”.