Minimum wage increase is not as simple as Doug Ford makes it sound. Complex with possible unintended consequences.

background 100By Staff

March 16th, 2018

BURLINGTON, ON

 

In the lead up to the June 7th election in Ontario, the minimum wage continues to be a hot button issue.

Both the provincial Liberals and the NDP have committed to increase the minimum wage from $14 this year to $15 an hour on January 1, 2019.

But the new leader of the Ontario PC party, Doug Ford, is now saying that he would freeze the minimum wage at $14 an hour and remove everyone earning less than $30,000 a year from the income tax rolls.

Two different scenarios with very different implications for low-wage workers in Ontario.

The Canadian Centre for Policy Alternatives (CCPA) an independent think tank, looked at the most recent Canada Revenue Agency (CRA) data from 2015 and found that 4.9 million Ontarians who had a total income of less than $30,000 per year filed taxes.

In a recent report the CCPA had this to say about not going forward with the minimum wage increases:

Two-thirds of those (3.2 million people) paid no income tax, due to a combination of existing tax deductions and tax credits. For those low-income Ontarians, the promise of no taxes offers nothing new.

The 34 per cent of Ontarians with incomes less than $30,000 who paid tax had an average provincial income tax bill of $485 in 2015.

The average Ontario tax rate for those with incomes below $30,000 a year was 0.9 per cent of their total income.

minimum wage protest sign

Minimum wage demand.

So is a $485 tax cut better than increasing the minimum wage from $14 to $15 an hour? The simple answer is: no.

Assuming Ontario minimum wage earners work 37.5 hours per week, a one dollar an hour increase in their wages would be worth $1,950 a year, before taxes.

These workers would be further ahead with an increase in wages rather than having their wages frozen and getting a tax cut.

But it doesn’t stop there.

We know that low-income people rely on public services. They can’t send their kids to private school, they rely on subsidized child care in order to work, they are more likely to take public transit.

Freezing the minimum wage and offering a tax cut in its place would not only reduce low-wage workers’ direct income, it would also reduce the amount of revenue that the province has to pay for the public services that they need to rely on: like public education, subsidized child care, and public transit.

This is simply a bad trade off for low-income Ontarians. And it’s an approach that would create a host of other problems.

Eliminating Ontario income tax on the first $30,000 of income for all Ontarians would be prohibitively expensive.

Removing anyone with less than $30,000 of income from the income tax rolls would mean that only half of the population (53 per cent) would be paying income taxes in Ontario.

Those who are paying income taxes could feel that they are carrying too much of the burden, further eroding our trust in government and public services. As public economist Armine Yalnizyan tweeted: “Can you spell tax revolt?”

Min wage growth

Is this rate of minimum wage growth inflationary?

This tax reduction could be targeted to low-income workers through a tax credit as Lindsey Tedds pointed out.

However, economists also worry about the impact on the incentive to work when you face a sharp increase in the taxes you pay on the next dollar of income. This was widely debated and called the “welfare wall” in the 1990s. As economist Mike Moffatt tweeted: “Anyone making $30,001 would face one hell of a marginal tax bill.”

Tax policy is complex and can have unintended consequences.

That’s why we need to know what the impact of such a proposal would be on low-income Ontarians, the public coffers, tax fairness, and incentives. Canning the minimum wage increase in favour of a tax cut would either be expensive or have a number of negative unintended consequences, and ultimately leaves low-wage workers no farther ahead.

Sheila-BlockSheila Block is a senior economist with the Canadian Centre for Policy Alternatives’ Ontario office.

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9 comments to Minimum wage increase is not as simple as Doug Ford makes it sound. Complex with possible unintended consequences..min wage

  • Jen

    Unfortunately these wage increases only affect the small business owner. Our small business has had to come up with an extra 2000 in net income to pay for this. We all know, or should know that the only people that actually benefit is the government. They now get to tax the low income earner a little bit more and screw the small business owner until they barely make ends meet. I am in the restaurant business so this is huge.I wouldn’t mind paying the higher wage IF THE SMALL BUSINESS OWNER got some sort of break like huge multi national companies do.

  • […] From Minimum wage increase is not as simple as Doug Ford makes it sound at the Burlington Gazette: […]

  • Stephen White

    The Canadian Centre for Policy Alternatives is hardly what I would describe as an objective public policy forum. I could swear that was Armine Yalnizyan on a panel discussion at the recent NDP Policy Convention in Edmonton earlier in the month. Not what I would call an “impartial analysis”.

    Here is what got missed in the excitement around the Wynne government’s increases in the minimum wage. First, not all employers have the ability to absorb this increase equally. Small “mom and pop” variety store owners and sole proprietor retail operators work with tight margins, and their ability to absorb this increase without increasing prices and is potentially inflationary, or cutting staff or hours is limited.

    Second, there is something called “wage compression” which has received scant attention. Not all companies pay their employees at minimum wage. More experienced employees might be paid slightly higher. When you increase the minimum wage at the magnitude that was done you reduce the differential between junior and senior employees. A senior team leader, for example, may have been paid $14.10/hr. prior to the increase. When the junior employee’s wages rise to $14/hr. the differential between junior and senior is now only ten cents. Employers are then compelled to increase the hourly rate of the senior employee in order to preserve the differential.

    Third, this province is not one large, amorphous labour market. It is comprised of several different sub-markets with different costs for products, goods and services. A wage increase to $14 an hour will have a much greater benefit in smaller communities in southwestern and eastern Ontario than in Toronto, but it will also impact employers more dramatically too.

    Finally, an increase in the minimum wage of the magnitude that was implemented has already had a severe and negative impact upon job losses as noted recently when the January labour market report was published. Over 59,000 jobs were lost in Ontario alone. Come to think of it, that was exactly what the Ontario Chamber of Commerce, the Canadian Federation for Independent Business, and numerous other organizations forecasted, which the Wynne government, in their typically arrogant manner, chose to ignore:

    http://www.cbc.ca/news/canada/toronto/ontario-jobs-update-losses-minimum-wage-1.4528669

    If the Wynne government wants to do something to improve the financial situation of the poor and at risk workers in the province then implement a guaranteed annual income program… which, come to think of it, is already being piloted in Hamilton and Lindsay. This initiative was implemented in parts of Manitoba successfully in the 1970’s by the Schreyer government. It exists in places like Denmark. It works.

  • Hans

    Re: As economist Mike Moffatt tweeted: “Anyone making $30,001 would face one hell of a marginal tax bill.” – a typical silly comment from an economist, since “marginal” means that a higher rate would be applied to only the last dollar.

    If the federal government followed suit in eliminating taxes for <$30K, presumably CPP eligibility could be affected as well….

  • Susan

    If Rob Ford is elected, will that mean that Tim Horton’s will not cut their employee’s meal breaks, or make workers start to pay for their uniforms, or cut their hours of work or take away tips?

    • Jen

      Really? You blame Tim Hortons for having to make cuts? Do you have any idea how much small business pays to the government. Unless you run a small business you don’t know. Somewhere along the line things have to be cut out. Don’t kid yourself, Tim Hortons Franchisees operate just like a small business. Do you think they get money handed down to them from TIM HORTONS head office? The only person anyone should point a finger at in all of this is Kathleen Wynne… She is the culprit. Such an idiot. We can also blame her for how much money we spend on utilities in Ontario too.

      Editor’s note:
      This comment was edited for abusive language

      • Susan L.

        Do I blame Tim Hortons for having to make cuts?
        Yes I do. Not all the Tim Hortons franchise owners made these cuts The deepest cuts were made mostly by the stores operated by one of the former owners, Ron Joyce, who has a net worth of about $1.4 billion. The reason Mr. Joyce cited for the cuts was the impending minimum raise to $15.00 per hour. That raise didn’t happen but the cuts stayed.

        Do you have any idea how much small business pays to the government.
        Actually, I do. I did small business tax returns for most of my career until I retired. But, for my own business, I did hire someone else.

        I would also like to make the point that owning a small business does not automatically entitle you to a good profit or any profit at all. Starting your own business is risky and sometimes people fail. And some people keep trying, like Henry Ford who started two automotive companies that failed before he succeeded with the Ford Motor Company.

  • Joseph Gaetan

    Minimum wage and its pro and cons is a complex subject full stop. If it was that important, why hold it at $10.25 between 2010 and 2014,should we not have been raising it during that time? From 2014 to 2017 minimum wages went from $11.00 to $11.40 a measly 40 cents.But then Wynne had a minimum wage epiphany and the subject was no longer complex. What is not complex is the relationship between a sudden interest in a $15.00 minimum wage and Wynnes declining popularity.

  • Zaffi

    A good tead. Thank you.

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